US unemployment falls to lowest in four years

US unemployment falls to lowest in four years
By Christopher Swann in Washington
Published: February 3 2006 14:03 | Last updated: February 3 2006 17:48. Copyright by the Financial Times

US unemployment fell to its lowest level in four and a half years in January while wage growth accelerated, heightening expectations that the Federal Reserve may raise interest rates again at its next meeting.

The US economy created 193,000 jobs in January, slightly lower than expected but enough to send the unemployment rate to its lowest since the middle of 2001.

Analysts had expected employment to rise by about 250,000 in the first month of the year. The disappointment was offset by upward revisions of 81,000 to employment figures in November and December.

The initial focus of the financial markets, however, was on the inflation implications of the figures. The fall in unemployment from 4.9 to 4.7 per cent raised concerns about labour shortages, which tend to push up wages. The average hourly earnings figure also moved higher by 0.4 per cent on the month. Over the year, the rise was 3.3 per cent - the highest level in three years.

Wage growth remans low by historic standards but has been creeping higher and is now almost keeping pace with inflation at about 3.4 per cent.

“The initial reaction of the market is to say that this makes it less likely that the Federal Reserve will be able to stop rising rates just yet,” said Nigel Gault, chief US economist at Global Insight, an consultancy.

This week the Fed raised interest rates to 4.5 per cent, its 14th consecutive increase.

The yield on the 10 year Treasury bond rose from 4.56 to 4.59 per cent in the minutes following the release of the jobs and wage data on Friday.

Although job creation was lower than expected in January, the average employment increase for the past three months ha been 229,000 - comfortably above the 150,000 economists believe is necessary to absorb new workers entering the labour force.

Economists remain uncertain whether the improvement in the labour market is finally giving workers more leverage in wage negotiations. Despite the recent acceleration, wages are still failing to keep pace with the rising cost of living. Real wages have fallen over the past 2 years.

Sophia Koropeckyj, an analyst at Economy.com, a consultancy, said that wage growth could continue to speed up. “Given that productivity is slowing, hiring activity will have to be stepped up to keep pace with demand,” she said. “This could maintain further upward pressure on wages.”

Others believe that the threat of moving production overseas will help restrain wage growth. The portion of the population activity seeking jobs also remains well below its peak. If these marginal workers are tempted back into the jobs market as demand for labour increases, this could also suppress pay rises.

The construction sector was particularly strong in January, with payrolls rising 46,000 - helped perhaps by unusually warm weather.