Step Up to the Plate

The two new managers of the U.S. economy, Ben Bernanke at the Federal Reserve and Henry Paulson at the Treasury, face serious challenges, not least new indications that a stronger labor market is slipping out of reach.

America’s middle class has been waiting five years for stronger employment and wage growth to help them manage rising everyday costs and burgeoning debt levels. Today’s estimates of the employment situation in May, released by the Bureau of Labor Statistics, do not bode well for those hopes. In May, job growth continued to weaken from prior months. According to today’s estimates, job growth totaled 75,000 new jobs in May, the smallest increase in the number of new jobs since October last year.

The May job figures also mark the third month in a row that employment growth has withered. And it comes on top of downward revisions for the past two months, which now show 37,000 fewer jobs than previously estimated. Thus continues a comparatively weak labor market expansion.

The average monthly job growth for this business cycle, which began in March 2001, was 0.4 percent on an annualized basis — about one-sixth the rate of growth from 1947 to March 2001. To underscore this point, only six months of this business cycle showed above-average employment growth — the last time in November 2005.

Last month’s weak job growth was a result of a relatively broad-based retreat in hiring across the economy. Three sectors saw employment actually decline. Retail trade jobs decreased by 27,100, manufacturing employment shrunk by 14,000, and jobs in the information sector, which includes broadcasting and motion pictures, dropped by 13,000 jobs.

In the past, such declines in these sectors were often accompanied by strong job growth in construction-related industries. Not so this time around. Construction alone added only 1,000 new jobs in May, and real estate financing added another 900 new jobs. Total construction related employment grew by 4,700 jobs — largely due to an increase of 2,900 new jobs in the retail sector dealing with building materials, such as home improvement stores. Clearly, the weakening construction sector is not offset by strong growth elsewhere.

Wage growth also slowed in May. Hourly wages grew at an annualized rate of 0.7 percent in May 2005, the slowest pace since November of last year, and weekly earnings actually declined by an annualized 2.8 percent, the largest drop in almost two years, since June 2004.

Given the rise in prices, it seems clear that workers’ earnings have not kept pace in inflation. In April, the last month for which data are available, inflation-adjusted hourly earnings were only 1.1 percent higher than at the start of the business cycle in March 2001. Hourly earnings were only 0.6 percent higher. Today’s figures suggest that even those meager gains are under threat.

As Mr. Bernanke prepares for his next meeting of the Federal Open Market Committee — the Federal Reserve’s policy making body — at the end of the month, and as Mr. Paulson readies himself for his new job at the Treasury, both men will have to think hard about how to ensure that America’s middle class families enjoy the fruits of growing economy.

Today’s employment and wage estimates illustrate this task may be harder than previously thought. Addressing this challenge will require real policy changes, not just rhetorical Band Aids.