Rising jobless and cost-of-living figures: stagflation on the way?
By Kim Clark

Posted 8/4/06

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Unemployment crept up to a seasonally adjusted 4.8 percent in July, its highest level in five months. That, combined with rising inflation, which clocked in at a 14-year-high annual rate of 4.3 percent in June, raised fears that energy prices may be slowing the economy while driving prices up--a recipe for potential stagflation.

The Department of Labor announced this morning that the economy generated 113,000 new jobs in June, which is generally considered not quite enough to absorb the 150,000 or so graduating students, immigrants, and others who join the workforce each month. As a result, the unemployment rate rose two tenths of a point. Interestingly, the service sector accounted for nearly all of the growth. It added 115,000 new jobs. The manufacturing sector lost 15,000 jobs in July. Construction, which had generated many of the new jobs over the past several years, added only 6,000 new workers.

In good news for workers, employers gave nonsupervisory employees raises last month that, on an annualized basis, amounted to about 5 percent. Employers said that despite the recent uptick in employment, the job market is still very tight, and workers are pushing for raises to cover higher gasoline and other costs.

Roy Krause, chief executive officer of Spherion, a placement agency, says that a year ago, out of every 10 applicants, his staffers could recommend four well-qualified prospects to employers. Today, he says, they may have to interview 15 to find two good candidates. And his clients are reporting that workers are changing jobs more frequently for slight raises or even slight reductions in commutes.

"We're coaching some of our clients to raise start rates" and telling all clients they must stay competitive on wages, he says.

Investment markets rallied after the report was released this morning. Economists said that traders probably believe the softening job market will eventually cap wage inflation and that the Federal Reserve may finally take a break from its two-year interest-rate hiking pattern.

The economy hasn't sunk into true stagnation, since it is expanding by more than 2 percent annually. But Gary Schlossberg, an economist for Wells Capital Management in San Francisco, says the latest numbers show a marked downward trend that, if continued, could prove worrisome.

"This shows businesses are becoming more cautious and growth is beginning to wind down," he says.

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