WASHINGTON -- The U.S. unemployment rate fell to 4.8 percent in July -- matching the 24-year low last reached in May -- as the nation's job-creation machine cranked up a notch, rekindling inflation concerns on Wall Street.
Stocks and bonds slumped as the employment statistics and separate reports on manufacturing and consumer confidence suggested that the economy may gain too much strength for Federal Reserve policy-makers. They might decide to push borrowing costs higher to guard against accelerating inflation.
"Momentum in the third quarter may be more than anyone expected," said William Sullivan, an economist at Dean Witter Securities in New York. The reports "show vigor in excess of the 2.5 percent growth the Fed prefers" and point to an expansion at a 4 percent annual rate in the current quarter, he said.
Last month's gain of 316,000 new jobs topped June's revised increase of 228,000 jobs and was paced by increased hiring by retailers, hospitals and others in service industries, Labor Department figures showed. The gain exceeded forecasts by Wall Street analysts of a rise of 195,000 non-farm jobs in July.
Workers' average hourly earnings also showed no change in July, after rising 0.3 percent in June -- and weekly earnings fell. "We are certainly seeing no sign of inflation in this report," said David Wyss, an economist at DRI/McGraw Hill in Lexington, Mass.
Analysts said the economy may be poised for a burst of too-fast growth, which will keep the Federal Reserve on alert. "It is a wake-up call that Nirvana -- steady growth and low inflation -- will not be with us forever," said Robert Dederick, an economic consultant at Northern Trust Co. in Chicago.
This kind of worry sent the benchmark 30-year Treasury bond down 2 1/8 points, the biggest slump in a year, pushing its yield 16 points to 6.45 percent. The Dow Jones Industrial Average, down more than 100 points in mid-fternoon, finished the day with a loss of 29 points to close at 8194.04.
Highlighting investor concerns was a report from the National Association of Purchasing Management showing that its factory index rose to 58.6 last month from 55.7 in June. Analysts had expected a July reading of 56.0. A reading of 50 or more in the NAPM index means manufacturing is expanding, while a reading below 50 signals a contraction.
NTC Orders placed with U.S. factories also rose 1.2 percent in June, reversing a 0.5 percent drop in May. A surge in civilian aircraft orders, particularly at Boeing Co., pushed up June factory orders, Commerce Department figures showed.
In addition, the University of Michigan's final index of consumer sentiment for July rose to 107.1 from 104.5 in June, people with access to the study said. The index, based on 100 set in 1966, provides a glimpse of how comfortable Americans are with their finances and the state of the economy.
And General Motors Corp., the world's largest automaker, reported a 6.5 percent increase in July sales, exceeding forecasts. Chrysler Corp. sales slumped, however.
Another report from the Commerce Department showed that U.S. personal income rose a larger-than-expected 0.6 percent in June, double the rise of the previous month, while spending rose 0.3 percent, a sign consumers may have more money to help push the economy's growth rate higher in the months ahead.
Disposable income, or the money left over after taxes, increased 0.5 percent in June while the savings rate rose to 4.4 percent in the month, the Commerce Department said.
Lower interest rates and the acceleration of job growth suggests the economy may grow in the 3.0 percent to 3.5 percent range in the current quarter, analysts said. Thursday, the Commerce Department said the economy grew at a 2.2 percent annual pace in the second quarter, down from a 4.9 percent growth rate in the first quarter of the year.
"Many analysts, including us and those at the Fed, worry this slowdown in the second quarter is only a pause," said Cary Leahey, chief U.S. economist at High Frequency Economics in Valhalla, N.Y. "Job and income growth, lofty consumer confidence and booming financial markets all improved in the second quarter, laying the spadework for a potential rebound later this year."
The 0.2 percent decline from June's 5.0 percent unemployment rate brought the measure back to where it was in May -- and equaled its lowest level since November 1973.
For the first seven months of 1997, monthly job growth averaged 246,000, higher than last year's monthly average of about 216,000 new jobs.
While the Fed continues to monitor effects of labor costs on consumer prices, so far this year inflation has been held in check by increased worker productivity, as well as wider use of computers. Most analysts are surprised wages haven't increased at a faster pace.
Pub Date: 8/02/97