With new hope that the Federal Reserve won't raise interest rates next month, investors sent the Dow Jones industrial average soaring more than 235 points yesterday after the government reported that hourly wages and new jobs grew slower than expected in August.
However, some economists believe high stock prices will still prompt the Fed to boost rates for the third time since June, as it continues its effort to curb inflation.
"I actually think that, were it not for the stock market, the Fed would probably be done raising rates for the year," said Kathleen Camilli, chief economist for Tucker Anthony in New York City.
"But the stock market will likely determine the decision made Oct. 5," the next time the central bank's interest rate-setting Federal Open Market Committee is scheduled to meet.
According to yesterday's Labor Department report, the economy added 124,000 jobs last month, far fewer than the July gain of 338,000 and below the 223,000 that analysts had expected.
The unemployment rate fell from 4.3 percent in July to 4.2 percent in August -- tying a 29-year low established in March and repeated in May.
Workers' average hourly earnings rose 0.2 percent to $13.30 in August after an increase of 0.3 percent in July.
That latter figure actually was revised downward from an earlier alarming indication of 0.5 percent.
In response to the report, stocks galloped. The Dow gained 235.24 points to close at 11,078.45, up 2.17 percent. The technology-heavy Nasdaq composite index jumped a record 108.87 points, or 3.98 percent, to close at 2,843.11.
The stock market liftoff was ignited by investor relief that inflation -- which would induce the Fed to raise interest rates -- was nowhere in sight.
As the U.S. economy has roared along the past three years, the pace of hiring has spiraled higher. The demand for workers has created severe labor shortages, forcing companies to substantially sweeten their wage offers to land qualified workers.
Fed Chairman Alan Greenspan has repeatedly warned that such labor shortages could hasten the return of inflation, the potentially ruinous acceleration in prices that makes it tough for a consumer to stretch a dollar.
For instance, as companies' labor costs increase, their profits get crimped. In response, these firms pass the extra cost along to customers in the form of higher prices for products or services.
Since yesterday's jobs report was the last one the Fed will see before its Oct. 5 meeting, it's the last major bit of data the central bank will have to use in deciding whether the labor shortage is increasing.
Economy remains robust
From that vantage point, the report is a positive one because it "shows an economic setting that remains reasonably robust, but perhaps not one that's on the verge of generating any significant inflationary pressures," said Kevin Flanagan, an economist for Morgan Stanley Dean Witter in New York City.
That was good news for the stock market, since inflation leads to higher interest rates, which, in turn, are bad for stocks. Higher rates increase borrowing costs for companies, cutting into profits. It's even worse for the new generation of high-technology and online firms, which, for the most part, are profitless but have a tremendous appetite for capital.
Even worse, as rates rise, risk-averse investors begin to abandon stocks in favor of safer investments such as bonds, certificates of deposit or even money market accounts.
That, too, stunts the growth of fledgling firms, which use their highly priced stock like money to acquire other companies or new technology. It also hurts the increasing number of consumers who have turned to the stock market to save for retirement.
But some economists say yesterday's bullish reaction to the jobs report may be so much wishful thinking.
First, economists such as Tucker Anthony's Camilli aren't sure the numbers are reliable.
Sometimes, as with the revision in the percentage increase in hourly wages for July, figures are modified a month or two after they are issued.
May not be enough
Camilli said she believes the U.S. economy is slowing, but not to the degree indicated by yesterday's jobs numbers.
And, second, even if the figures are accurate, it may not be enough to keep the Fed from raising interest rates. The reason: Stock prices remain high.
Increasingly, when scanning the horizon for hints of inflation, Greenspan is focusing on the market values of assets such as stocks or homes, which have risen almost relentlessly during the most of this decade.
Because of rising home prices and the powerful bull market, Americans' average net worth has jumped 50 percent during the last five years and now totals $37.6 trillion, according to Bank of America Private Bank in Jacksonville, Fla.
Thanks to the so-called "wealth effect," that huge increase has allowed the personal savings rate to slip to zero.
In turn, that's fueled tremendous increases in the disposable income available to power the domestic economy at growth rates the Fed fears are inflationary.
Greenspan has tried -- unsuccessfully, to date -- to "jawbone" the stock market a bit lower by merely hinting at higher rates.
On Aug. 27, in a speech made to economists and central bankers in Jackson Hole, Wyo., Greenspan seemed to express concerns about the high prices stocks and homes are fetching.
He raised the question of whether the country might not be in a "bubble economy" -- where inflated asset values spark unsustainable, but inflationary, growth.
What's more, in his typically indirect fashion, the central banker said stock prices matter to the economy and, therefore, will have to be a factor in the Fed's analysis of monetary policy. Because of that, Greenspan and Co. will use the next month to carefully weigh what to do with interest rates.
"I think the Fed is still very sharply divided over the appropriate monetary policy," said Scott J. Brown, chief economist for Raymond James & Associates in St. Petersburg, Fla.
"They see no significant increase in inflation. But they see a lot more strength" in demand for consumer goods and for stocks than viewed as healthy.
Wire services contributed to this article.
Pub Date: 9/04/99