Labor market strength continues to confound and astound

The nation’s unemployment rate remained at 4.7% in January, and job growth far exceeded expectations. Nonfarm payroll employment grew by an estimated 385,000 jobs between December and January, with well-above average gains in manufacturing and construction.

This latest labor market report — the first significant government release for the first month of the new year — provides no support for the prevailing view that economic growth will slow markedly during the first half of 1998.

Perhaps the biggest surprise is the strength in manufacturing job creation, where employment expanded by 162,000 between September and January, after marginal growth throughout 1996 and early 1997.

Shortages in the skilled labor pool are beginning to show up in measures of wage inflation. The Labor Dept.’s quarterly Employment Cost Index (ECI) for the period ended in December showed total employer compensation costs up a full 1% for the quarter. This amount was the largest quarterly gain in combined wage and benefit costs since mid-1993. Benefit costs rose 0.9% during the final quarter of 1997, making it the sharpest quarterly increase recorded since the third quarter of 1994. Wages and salaries advanced 1.1% over the quarter. December 1997 wages and salaries were 3.8% above their December 1996 level, while benefit costs rose a cumulative 2.1% over the course of 1997.

Manufacturing sector productivity increases were much stronger than the all-industries average. Productivity grew by an average 4.4% last year in manufacturing firms, the fourth consecutive year of improving growth, and further evidence that investment in new equipment and manufacturing processes is paying off.

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