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Labor market seen as tight
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January 6, 2000: 1:58 p.m. ET
Friday’s report expected to show worker shortage; possible inflationary sign
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - There is little doubt among Wall Street economists that December’s employment growth numbers will confirm a remarkable year in the U.S. job market - a year in which the jobless rate hit its lowest level in a generation and help-wanted signs littered store windows across the country.
To Main Street, that is great news. Not since the 1960s have so many Americans had jobs - and a choice of jobs, to boot. Demand for labor in services, retail and technology, among other industries, generated more jobs in 1999 than the number of available workers to fill them, making it a buyers market for job hunters.
Alas -- good news is often bad news on Wall Street, particularly when it comes to job creation.
Any evidence that companies cannot find enough workers and that workers are getting paid more to stick around could rattle the already jittery stock market as investors conclude that the U.S. economy is running at a pace that could potentially stoke inflation - which could prompt the Federal Reserve to raise interest rates the fourth time in a year next month to slow it down.
A rate hike - ‘guilty until proven innocent’
"All signs point to another solid employment report in December,” said Rick MacDonald, a markets analyst with Standard & Poor’s MMS in San Francisco. "Given that the Greenspan-led Fed has indicated that they will likely fire another round of tightening as early as February unless we see some signs of a slowdown, it's no surprise that U.S. financial markets have cast a verdict of guilty until proven innocent on the upcoming report.”
In the employment report scheduled for release Friday, the Labor Department is expected to report that 225,000 new jobs were added to the economy in December, according to analysts polled by Briefing.com, bringing the total number of new positions created in 1999 to 2.392 million. As of November 1999 the economy had created 2.167 million jobs, according to Labor Department figures. Wages likely rose at a 0.3 percent pace while the jobless rate remained at 4.1 percent.
Of concern to economists, investors and Fed officials has been the robust U.S. job market and the shrinking pool of workers available to produce the goods and services that U.S. consumers continue to demand. According to economic theory, fewer positions often means employers must pay their workers higher wages, a path to inflation.
That is why Friday’s numbers -- even though they reflect the remarkable strides that the U.S. economy has made in the past decade -- may not be looked upon kindly by financial market watchers.
Shrinkage in the labor pool
"There is definitely shrinkage in the pool of available workers, and that could at some point lead to higher wages," said Stephen Slifer, chief economist with Morgan Stanley Dean Witter. "If the Fed is looking at that, they could decide to move, and that’s what has the market very occupied."
The Fed in November lifted short-term interest rates by a quarter point -- the third increase of 1999 -- in an effort to slow the economy and keep inflation under wraps. It lifted its benchmark Fed funds rate - the minimum interest rate that commercial banks must fix to their overnight lending to each other -- to 5.5 percent from 5.25 percent.
At that time, the Fed also said it was switching its bias toward raising rates again to "neutral” from "tightening,” and also took the unusual step of naming the factor that could influence their decision to raise rates again -- the growing shortage of American workers.
" ... the pool of available workers willing to take jobs has been drawn down further in recent months, a trend that must eventually be contained if inflationary imbalances are to remain in check and economic expansion continue," the Fed said in a statement accompanying the rate increase.
Smooth Y2K sailing
At their Dec. 21st meeting, Fed policy makers opted to leave both rates and their bias toward future rate actions unchanged -- to avoid causing more problems ahead of the Y2K date rollover. However, with nary a glitch to report, investors are now convinced the Fed will not hesitate at their next meeting to act.
Fed officials next gather in Washington Feb. 1 through Feb. 2 to discuss the progress of the U.S. economy and the direction of interest rates.
Of course, many economists are convinced that the reason so many people can have jobs without their wages rising is because of strong productivity gains. Traditional economic models say robust growth and record employment -- features of the economy for several years now -- should have led to a pickup in inflation, and eventually, a recession.
But that has yet to happen -- something a growing number of economists attribute to greater worker productivity per hour as well as stiff global competition. A big contributor has been technology, including the Internet, which allows people to work more efficiently and companies to reduce costs and stay competitive by keeping a lid on prices.
Strong productivity gains
"Productivity has been one of the main driving forces behind the strong employment numbers,” said Ian Shepherdson, chief U.S. economist with High Frequency Economics. "Technology has allowed people to work more efficiently and allowed companies to keep wages under wraps.”
Still, he added, "We are watching carefully for signs that the labor pool is draining. Once that happens there will be little choice but for employers to start paying workers more.”
All told, the number of new jobs generated by the U.S. economy in 1999, while high does not even come close to a record in terms of year-over-year job creation, according to Labor Department figures.
Between November 1998 and November 1999, the total number of non-farm jobs rose at a 1.9 percent pace on a seasonally adjusted basis, the Labor Department said. That is less than the 2.4 percent pace recorded in 1998, the 3.5 percent gain posted in 1994 and the record 11.4 percent increase posted way back in 1941 - the year the United States joined World War II. 
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