Alan Greenspan, chairman of the Federal Reserve, has signalled that the tightness of the labour market and the potential for wage growth is one of his key concerns in setting interest rate policy. Markets are still concerned the Fed may raise rates at its next meeting, but for the moment those fears are easing.
US unemployment fell to 4.1 per cent in October from 4.2 per cent, the Labor Department said, the lowest since a 3.9 per cent figure in January 1970. The share of the adult population that is employed is approaching a record high at 64.2 per cent.
But payrolls grew only slowly, by 310,000, around the level that the markets had been expecting, and the pace of payroll growth in the last two months is below the trend. Average hourly earnings grew only 0.1 per cent in the month, from $13.36 to $13.37, below what the markets had been expecting. In the year to October, earnings grew by 3.6 per cent, still moderate growth.
Stocks soared, with the Dow Jones Industrial Average up more than 200 points in mid-morning before falling back slightly. Bond yields also tumbled, as dealers factored in a more favourable inflation outlook and the yield on the 30-year Treasury bond fell back to 6.03 per cent from 6.10 per cent.
Three-quarters of the jobs generated in October were in the service sector, and though the manufacturing sector is recovering from the impact on exports of the Asian financial crisis, it is feeding through slowly to jobs. There were slight declines in the average work week and factory overtime.
Retail sales figures early in the week suggested that consumers are pulling in their horns a little as the two interest rate increases of the year start to feed through. Put together, the figures suggest to many economists that when the Fed meets on 16 November, it will decide to leave interest rates unchanged. The Fed meets once more this year - on 21 December - but with concerns about the year 2000 effect on financial markets, it is unlikely to change rates then.