By Jonathan House and Eric Morath
The U.S. economic expansion is entering its sixth year with a shiny exterior after the best stretch of job growth
in almost a decade. But under the hood, the recovery's engine continues to sputter.
Overall job growth in June, when employers added 288,000 jobs, showed businesses gaining confidence and shedding
the caution that has defined the labor market in the five years since the recession ended. The nation's jobless rate
fell to 6.1%, the lowest level since September 2008, the Labor Department said Thursday, pushing the rate closer to what
many economists consider full employment.
Yet those gauges of the labor market don't capture other weaknesses in the employment spectrum. Nor do they explain
the mysteries of an economy that has been struggling to gain enough velocity to shake off its many ailments long after
the recession ended.
Overall economic growth in the second quarter of the year may not prove robust enough to offset the first quarter's
weather-induced 2.9% annualized rate of contraction. Consumer spending remains weak, a consequence of a labor market
delivering new jobs but skimpy wage growth. And the share of Americans working or looking for work--the so-called labor-
force participation rate--still hovers near its lowest levels since the late 1970s, despite steady hiring.
PMW Technologies Inc., a supplier of human-resources software called PeopleMatter, highlights the divide in the
economy. The Charleston, S.C., firm has added 50 higher-paid software engineers and salespeople over the past year,
boosting the company's benefits package to attract and retain high-skilled workers. It plans to add 100 positions over
the next year, bringing its total headcount to 250.
Yet the company is witnessing the choppiness among its clients in the retail and food-services sectors. "The
economy's very fragile," said Chief Executive Nate DaPore. "We're in a muddle-through economy."
Against this mixed backdrop, many investors are focusing on the positive signs and staying bullish about what's
over the horizon. The optimism helped propel the Dow Jones Industrial Average above 17000 for the first time on
The nature of the latest labor-market gains presents a challenge for Federal Reserve officials: Improvement in top-
line metrics such as unemployment and inflation, both of which are nearing the central bank's targets, is spurring
speculation about earlier-than-expected rate increases even though key gauges under the surface show the recovery
Capital Economics' chief U.S. economist, Paul Ashworth, wrote Thursday that the strong job growth figures are among
"the key reasons why we think the Fed will be persuaded to begin raising interest rates earlier than most expect." He
forecast the first rate hike in March.
But other data show the broader economy is still struggling to rebound from an unusually sharp decline in the first
three months of the year. Harsh weather and a drawdown of business inventories contributed to the fastest decline in
economic output in five years, a contraction at an annualized 2.9% pace.
Hopes for a big second-quarter rebound are now too beginning to wither, too. Forecasting firm Macroeconomic
Advisers on Thursday lowered its estimate of second-quarter growth by 0.6 percentage point to an annualized 2.7% after
new trade data showed stronger imports than expected, subtracting from domestic output. J.P. Morgan Chase pulled its
estimate down to a 2.5% pace from 3%.
Other economists' second-quarter forecasts are running only slightly ahead of the 2.4% pace averaged from mid-2009,
when the recession ended, through the end of last year.
While import growth hints at underlying domestic demand, separate Commerce Department data showed household
spending in May rose a lackluster 0.2%. When adjusted for inflation, which is beginning to accelerate, spending actually
declined for the month.
Americans are facing higher prices this year for food and energy, including gasoline. Higher costs for those
staples can limit discretionary spending at restaurants, malls and online.
U.S. workers' earnings have been climbing about 2% annually--just enough to cover inflation--and show few signs of
breaking out of that range as an abundance of idled labor allows firms to keep wages contained. "Slack in the labor
market...is dwindling, but we're not seeing that on the wage side yet," said Alan MacEachin, an economist at Navy
Federal Credit Union.
Fed officials must weigh that slack against an unemployment rate falling faster than they projected. Last month,
Fed policy makers projected the U.S. jobless rate would be a little higher than 6% at the end of 2014, basically where
it stands after Thursday's report.
Also flashing on the Fed's dashboard: The number of people working part-time because they can't find full-time work
rose and the share of population either working or looking for work remains around 30-year lows. June's labor-force
participation rate was 62.8%, unchanged from the prior month.
The central bank wants to see a sustained labor-market recovery before raising interest rates from near zero. St.
Louis Fed President James Bullard said late last month that the Fed may need to lift rates earlier in 2015. If the
economy continues to improve, "I predict the conversation about monetary policy will change," he said.
The jury is still out on whether an improving job market is leading shoppers to spend more. Wal-Mart Stores Inc.
Chief Executive Doug McMillon told analysts during a meeting this past week that the discount retailer wasn't seeing
much of a difference compared with 90 or 180 days ago.
That diverged from remarks made by Kroger Co. in June that its customers are "exhibiting less cautious spending
behavior," according to CEO Rodney McMullen. "More customers perceive the economy to be in recovery, " as shoppers spend
more on things like premium pet food and organic products, he said.
Likewise, Molson Coors Brewing Co. CEO Peter Swinburn told investors recently that the past five years were
challenging for its core drinkers in North America but that the company is now starting to see the "green shoots" of
The divergent views may have to do with the circumstances facing different customer segments. The low-income core
that makes up Wal-Mart's base are still dealing with job losses and cuts to government benefits and are recovering
slower than wealthier shoppers who have benefited from rising home and stock prices, William Blair analyst Mark Miller
Another factor restraining consumer spending is likely that much of the new hiring is concentrated in low-wage
fields. The retail industry added over 40,000 workers last month and hospitality businesses payrolls rose by 39,000.
Higher-paying sectors lagged behind. Manufacturing added 16,000 new jobs and construction added 6,000. The public
sector was an exception. Government employment grew by 26,000 last month and is up by 54,000 so far this year, following
a five-year downsizing.
Wayne Slack of Chandler, Ariz., is one job seeker who is holding out for a better position. After losing a
supervisory role in aerospace manufacturing, he's been unwilling to accept a lower-paying position. Instead, the 47-
year-old enrolled in community college after being told his computer skills were lacking. "I'm willing to go backwards a
tad, but I'm not willing to take an $8 pay cut to stand in front of a machine again," he said.
Shelly Banjo and Michael S. Derby contributed to this article.
(END) Dow Jones Newswires
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