THE LABOR MARKET
EMPLOYMENT AND LABOR SUPPLY
The labor market in early 2000 continued to be characterized by substantial job creation, a historically low level of unemployment, and sizable advances in productiv-ity that have held labor costs in check. The rise in overall nonfarm payroll employ-ment, which totaled more than 1-1/2 million over the first half of the year, was swelled by the federal government’s hiring of intermittent workers to conduct the decennial census. Apart from that temporary boost, which accounted for about one-fourth of the net gain in jobs between December and June, nonfarm payroll em-ployment increased an average of 190,000 per month, somewhat below the robust pace of the preceding four years.
Monthly changes in private payrolls were uneven at times during the first half the year, but, on balance, the pace of hiring, while still solid, appears to have mod-erated between the first and second quarters. In some industries, such as con-struction, the pattern appears to have been exaggerated by unseasonably high lev-els of activity during the winter that accelerated hiring that typically would have occurred in the spring. After a robust first quarter, construction employment de-clined between April and June; on average, hiring in this industry over the first half of the year was only a bit slower than the rapid pace that prevailed from 1996 to 1999. However, employment gains in the services industry, particularly in business and health services, were smaller in the second quarter than in the first while job cutbacks occurred in finance, insurance, and real estate after four and one-half years of steady expansion. Nonetheless, strong domestic demand for consumer dur-ables and business equipment, along with support for exports from the pickup in economic activity abroad, led to a leveling off in manufacturing employment over the first half of 2000 after almost two years of decline. And, with consumer spending brisk, employment at retail establishments, although fluctuating widely from month to month, remained generally on a solid uptrend over the first half.
The supply of labor increased slowly in recent years relative to the demand for workers. The labor force participation rate was unchanged, on average, at 67.1 percent from 1997 to 1999; that level was just 0.6 percentage point higher than at the beginning of the expansion in 1990. The stability of the participation rate over the 1997-99 period was somewhat surprising because the incentives to enter the workforce seemed powerful: Hiring was strong, real wages were rising more rapidly than earlier in the expansion, and individuals perceived that jobs were plentiful. However, the robust demand for new workers instead led to a substantial decline in unemployment, and the civilian jobless rate fell from 5-1/4 percent at the beginning of 1997 to just over 4 percent at the end of 1999.
This year, the labor force participation rate ratcheted up sharply over the first four months of the year before dropping back in recent months as employ-ment slowed. The spike in participation early this year may have been a response to ready availability of job opportunities, but Census hiring may also have temporarily attracted some individuals into the workforce. On net, growth of labor demand and supply have been more balanced so far this year, and the unemployment rate has held near its thirty-year low of 4 percent. At midyear, very few signs of a signifi-cant easing in labor market pressures have surfaced. Employers responding to vari-ous private surveys of business conditions report that they have been unable to hire as many workers as they would like because skilled workers are in short supply and competition from other firms is keen. Those concerns about hiring have per-sisted even as new claims for unemployment insurance have drifted up from very low levels in the past several months, suggesting that some employers may be mak-ing workforce adjustments in response to slower economic activity.
LABOR COSTS AND PRODUCTIVITY
Reports by businesses that workers are in short supply and that they are under pressure to increase compensation to be competitive in hiring and retaining employ-ees became more intense early this year. However, the available statistical indica-tors are providing somewhat mixed and inconsistent signals of whether a broad ac-celeration in wage and benefit costs is emerging. Hourly compensation, as measured by the employment cost index (ECI) for private nonfarm businesses, increased sharply during the first quarter to a level more than 4-1/2 percent above a year earlier. Before that jump, year-over-year changes in the ECI compensation series had remained close to 3-1/2 percent for three years. However, an alternative measure of compensation per hour, calculated as part of the productivity and cost series, which has shown higher rates of increase than the ECI in recent years, slowed in the first quarter of this year. For the nonfarm business sector, compen-sation per hour in the first quarter was 4-1/4 percent higher than a year earlier; in the first quarter of 1999, the four-quarter change was 5-1/4 percent.
Part of the acceleration in the ECI in the first quarter was the result of a sharp step-up in the wage and salary component of compensation change. While higher rates of straight-time pay were widespread across industry and occupational groups, the most striking increase occurred in the finance, insurance, and real es-tate industry where the year-over-year change in wages and salaries jumped from about 4 percent for the period ending in December 1999 to almost 8-1/2 percent for the period ending in March of this year. The sudden spike in wages in that sec-tor could be related to commissions that are tied directly to activity levels in the industry and, thus, would not represent a lasting influence on wage inflation. For other industries, wages and salaries accelerated moderately, which might appear plausible in light of reports that employers are experiencing shortages of some types of skilled workers. However, the uptrend in wage inflation that surfaced in the first-quarter ECI has not been so readily apparent in the monthly data on aver-age hourly earnings of production or nonsupervisory workers, which are available through June.
Although average hourly earnings increased at an annual rate of 4 percent be-tween December and June, the June level of hourly wages stood 3-3/4 percent higher than a year earlier, the same as the increase between June 1998 and June 1999.
While employers in many industries appear to have kept wage increases mod-erate, they may be facing greater pressures from rising costs of employee bene-fits. The ECI measure of benefit costs rose close to 3-1/2 percent during 1999, a percentage point faster than during 1998; these costs accelerated sharply further in the first quarter of this year to a level 5-1/2 percent above a year earlier. Much of last year’s pickup in benefit costs was associated with faster rates of increase in employer contributions to health insurance, and the first-quarter ECI figures indicated another step-up in this component of costs. Private survey information and available measures of prices in the health care industry suggest that the upturn in the employer costs of health care benefits is associated with both higher costs of health care and employers’ willingness to offer attractive benefit packages in order to compete for workers in a tight labor market. Indeed, employers have been reporting that they are enhancing compensation packages with a variety of benefits in order to hire and retain employees. Some of these offerings are included in the ECI; for instance, the ECI report for the first quarter noted a pickup in supple-mental forms of pay, such as overtime and nonproduction bonuses, and in paid leave. However, other benefits cited by employers, including stock options, hiring and re-tention bonuses, and discounts on store purchases, are not measured in the ECI. The productivity and costs measure of hourly compensation may capture more of the non-wage costs that employers incur, but even for that series, the best es-timates of employer compensation costs are available only after business reports for unemployment insurance and tax records are tabulated and folded into the an-nual revisions of the national income and product accounts.
Because businesses have realized sizable gains in worker productivity, com-pensation increases have not generated significant pressure on overall costs of pro-duction. Output per hour in the nonfarm business sector posted another solid ad-vance in the first quarter, rising to a level 3-3/4 percent above a year earlier and offsetting much of the rise in hourly compensation over the period. For nonfinancial corporations, the subset of the nonfarm business sector that excludes types of businesses for which output is measured less directly, the 4 percent year-over-year increase in productivity held unit labor costs unchanged.
With the further robust increases in labor productivity recently, the average rise in output per hour in the nonfarm business sector since early 1997 has stepped up further to 3 percent from the 2 percent pace of the 1995-97 period. What has been particularly impressive is that the acceleration of productivity in the past several years has exceeded the pickup in output growth over the period and, thus, does not appear to be simply a cyclical response to more rapidly rising demand. Rather, businesses are likely realizing substantial and lasting payoffs from their investment in equipment and processes that embody the technological advances of the past several years.
PRICES
Rates of increase in the broader measures of prices moved up further in early 2000. After having accelerated from 1 percent during 1998 to 1-1/2 percent last year, the chain-type price index for GDP–prices of goods and services that are produced domestically–increased at an annual rate of 3 percent in the first quar-ter of this year. The upswing in inflation for goods and services purchased by con-sumers, businesses, and governments has been somewhat greater: The chain-type price index for gross domestic purchases rose at an annual rate of 3-1/2 percent in the first quarter after having increased about 2 percent during 1999 and just 3/4 percent during 1998.
The pass-through of the steep rise in the cost of imported crude oil that be-gan in early 1999 and continued into the first half of this year has been the princi-pal factor in the acceleration of the prices of goods and services purchased. The effect of higher energy costs on domestic prices has been most apparent in indexes of prices paid by consumers. After having risen 12 percent during 1999, the chain-type price index for energy items in the price index for personal consumption ex-penditures (PCE) jumped at an annual rate of 35 percent in the first quarter of 2000; the first-quarter rise in the energy component of the CPI was similar.
Swings in energy prices continued to have a noticeable effect on overall measures of consumer prices in the second quarter. After world oil prices dropped back temporarily in the spring, the domestic price of motor fuel dropped in April and May, and consumer prices for energy, as measured by the CPI, retraced some of the first-quarter increase. As a result, the overall CPI was little changed over the two months. However, with prices of crude oil having climbed again, the bounce-back in prices of motor fuel led to a sharp increase in the CPI for energy in June. In addition, with strong demand pressing against available supplies, consumer prices of natural gas continued to rise rapidly in the second quarter. In contrast to the steep rise in energy prices, the CPI for food has risen slightly less than other non-energy prices so far this year.
Higher petroleum costs also fed through into higher producer costs for a number of intermediate materials. Rising prices for inputs such as chemicals and paints contributed importantly to the acceleration in the producer price index for intermediate materials excluding food and energy from about 1-3/4 percent during 1999 to an annual rate of 3-1/2 percent over the first half of this year. Upward pressure on input prices was also apparent for construction materials, although these have eased more recently. Prices of imported industrial supplies also picked up early this year owing to higher costs of petroleum inputs.
Core consumer price inflation has also been running a little higher so far this year. The chain-type price index for personal consumption expenditures other than food and energy increased at an annual rate of 2-1/4 percent in the first quarter compared with an increase of 1-1/2 percent during 1999. Based on the monthly es-timates of PCE prices in April and May, core PCE price inflation looks to have been just a little below its first-quarter rate. After having risen just over 2 percent be-tween the fourth quarter of 1998 and the fourth quarter of 1999, the CPI exclud-ing food and energy increased at an annual rate of 2-1/4 percent in the first quar-ter of 2000 and at a 2-3/4 percent rate in the second quarter. In part, the rise in core inflation likely reflects the indirect effects of higher energy costs on the prices of a variety of goods and services, although these effects are difficult to quantify with precision. Moreover, prices of non-oil imported goods, which had been declining from late 1995 through the middle of last year, continued to trend up early this year.
The pickup in core inflation, as measured by the CPI, has occurred for both consumer goods and services. Although price increases for nondurable goods excluding food and energy moderated, prices of consumer durables, which had fallen between 1996 and 1999, were little changed, on balance, over the first half of this year. The CPI continued to register steep declines for household electronic goods and computers, but prices of other types of consumer durables have increased, on net, so far this year. The rate of increase in the prices of non-energy consumer services has also been somewhat faster; the CPI for these items increased at an annual rate of 3-1/2 percent during the first two quarters of this year compared with a rise of 2-3/4 percent in 1999. Larger increases in the CPI measures of rent and of medical services have contributed importantly to this acceleration. Another factor has been a steeper rise in airfares, which have been boosted in part to cover the higher cost of fuel.
In addition to slightly higher core consumer price inflation, the national in-come and product accounts measure of prices for private fixed investment goods shows that the downtrend in prices for business fixed investment items has been interrupted. Most notably, declines in the prices of computing equipment became much smaller in the final quarter of last year and the first quarter of this year. A series of disruptions to the supply of component inputs to computing equipment has combined with exceptionally strong demand to cut the rate of price decline for computers, as measured by the chain-type price index, to an annual rate of 12 per-cent late last year and early this year–half the pace of the preceding three and one-half years. At the same time, prices of other types of equipment and software continued to be little changed, and the chain-type index for nonresidential struc-tures investment remained on a moderate uptrend. In contrast, the further upward pressure on construction costs at the beginning of the year continued to push the price index for residential construction higher; after having accelerated from 3 percent to 3-1/2 percent between 1998 and 1999, this index increased at an annual rate of 4-1/4 percent in the first quarter of 2000.
Although actual inflation moved a bit higher over the first half of 2000, in-flation expectations have been little changed. Households responding to the Michi-gan SRC survey in June were sensitive to the adverse effect of higher energy prices on their real income but seemed to believe that the inflationary shock would be short-lived. The median of their expected change in CPI inflation over the com-ing twelve months was 2.9 percent. Moreover, they remained optimistic that infla-tion would remain at about that rate over the longer run, reporting a 2.8 percent median of expected inflation during the next five to ten years. In both instances, their expectations are essentially the same as at the end of 1999, although the year-ahead expectations are above the lower levels that had prevailed in 1997 and early 1998.
U.S. FINANCIAL MARKETS
Conditions in markets for private credit firmed on balance since the end of 1999. Against a backdrop of continued economic vitality in the United States and a tighter monetary policy stance, private borrowing rates are higher, on net, particu-larly those charged to riskier borrowers. In addition, banks have tightened terms and standards on most types of loans. Higher real interest rates–as measured based on inflation expectations derived from surveys and from yields on the Treas-ury’s inflation-indexed securities–account for the bulk of the increase in interest rates this year, with short-term real rates having increased the most. Rising mar-ket interest rates and heightened uncertainties about corporate prospects, espe-cially with regard to the high-tech sector, have occasionally dampened flows in the corporate bond market and have weighed on the equity market, which has, at times, experienced considerable volatility. Through mid-July, the broad-based Wilshire 5000 equity index was up approximately 3 percent for the year.