Strong hiring shows depth of expansion

A growing United States economy is starting to soak up the ranks of the unemployed.

Service-sector firms from accounting to hotels to restaurants are on a hiring binge. Their search for workers is starting to cause the labor markets to tighten - which is beginning to reduce the ranks of those who have been searching for work. In the months ahead, economists anticipate the quest for workers will spread to the manufacturing sector, which has been laying workers off to date.

A healthy job market has important implications for the economy - from Federal Reserve policy to the mood on Main Street. More workers add buying power, sustaining the economic recovery. Job growth also increases the amount of taxes collected, which could help reduce the federal budget deficit. It could also help wages increase, which will help consumers keep up with rising interest rates and higher fuel prices.

"Job creation is the lifeblood of the economy and it's flowing very good right now," says Anthony Chan, an economist at JPMorgan Asset Management in Columbus, Ohio. "You have everything working right."

The evidence of this improvement surfaced Friday, when the Department of Labor reported 207,000 new jobs were created in July, the best showing since April. This was a marked improvement over the 166,000 created in June. Importantly, wages rose 0.4 percent, twice as fast as economists had anticipated. The unemployment rate remained at 5 percent as news of a better job market spread and more people entered the workforce.

"We saw a big surge in the labor-force growth of 450,000 people, and this tells me when people realize the economic recovery is real, they will come out of the woodwork," says Mr. Chan.

The improvement in the labor market is not a surprise to Roy Krause, president of Spherion, an employment agency based in Fort Lauderdale, Fla. "We have more jobs and orders than people," he says, including a surge in permanent hiring. Finding quality candidates is proving difficult, he says.

The job growth, however, has yet to spread to the manufacturing sector. Last month, mainly because of layoffs in the auto sector, employment dropped by 4,000 workers. "Textiles continue to bleed jobs, and furniture is another industry the Chinese have been colonizing over the last couple of years," says Tom Duesterberg, president of Manufacturers Alliance/MAPI.

Over the past three months, industry has announced about 300,000 layoffs, according to John Challenger of Challenger, Gray and Christmas in Chicago. Among the companies announcing significant layoffs are Hewlett-Packard, Ford, GM, Kodak, and Winn-Dixie. "I think the layoffs are suggesting the final stages of the expansion," he says.

But the pace of layoffs are running about the same as last year, when total employment grew by 2 million jobs. Many of these jobs are in small- to medium-size companies. "They can't hire people fast enough," says Joyce Gioia, president of the Herman Group, business strategist in Greensboro, N.C.

Some economists expect further gains in manufacturing, as well. Recent employment reports have shown improvements in computers, metal fabrication, and machinery industries. At the same time, companies are expected to pick up their pace to replace depleted inventory level.

"If we see a pickup in manufacturing output, we can see a shift from red to black in terms of jobs," says David Heuther, chief economist at the National Association of Manufacturers in Washington. "It's in the tea leaves for some modest increases in employment in the months ahead."

In fact, for the second month in a row, the number of long-term unemployed fell to under 20 percent of the total number out of work. It has been over 20 percent for the past three years. "We are seeing some levels of improvement," says Andrew Stettner, a policy analyst at the National Employment Law Project in New York. "But we're not to the point where everyone who lost good jobs during the recession is able to get good work or decent paid work."

Some of the improvement in jobs comes from retraining programs that are starting to make a difference, says economist John Silvia of Wachovia Securities in Charlotte, N.C. "It's starting to happen in Virginia and North Carolina, bringing down the long-term unemployment that is the result of the globalization of trade over the last 10 years."

Although the job market is tightening, the labor market is not tight enough to cause alarm at the Federal Reserve, which meets to set interest rates Tuesday, economists say. "There is still evidence of slack in the job market," says Lyle Gramley, a consulting economist at the Schwab Washington Research Group. "All we can say is we are getting closer to full employment."

Tuesday, the Fed is expected to raise interest rates for the 10th consecutive time, bumping the Federal Funds rate up one quarter of a percentage point to 3.5 percent. Mr. Gramley, like many other economists, expects the Fed will continue to raise interest rates through the balance of the year. "It requires a lot of vigilance on their part not to allow a buildup of future inflation pressures," says Gramley, a former Fed governor.

Recently, the long-term bond market has factored in some of these changes, and the yield on long-term bonds is up nearly .5 percent. "This will ripple through the economy, particularly housing," says Gramley, who believes this increase will go over well at the Fed, which has been concerned about the economic stimulus of long-term rates.

The Fed governors are likely to discuss changes now taking place in productivity. Chan expects the government to report Tuesday that productivity fell by almost 50 percent from the prior quarter. "That means even if growth is weaker than last year, we can still see an increase in employment," he says.