COMMERCE BANK ECONOMIC REVIEW - April 2005

Oil Up and Jobs Down: What A Mess!

By Joel L. Naroff, Ph.D.

March came in like a lion and went out like a lamb. And in between, there was just about everything else, at least when it came to the economy. We had surges in oil prices, Fed concerns about inflation and a very disappointing jobs report. It was almost enough to make an economic commentator jump for joy, as nothing is more boring than consistent data.

Let’s start at the very beginning, which is a very good place to start. The February employment numbers were great and we really thought that the economy was off to the races. Decent readings about the manufacturing sector and great reports of a surging services sector seemed to support the conclusion that the remaining weaknesses in the economy were largely a thing of the past.

But no good news goes unquestioned, and the March payroll data were quite disappointing. The 110,000 gain was about half of what was forecast and well below the 243,000 increase posted in February. There were few sectors where job gains could be considered strong. 

The reason the employment report was such a shock was that most surveys pointed to continued hiring. Indeed, there are signs that the labor market really is not as soft as the payroll numbers would imply. The unemployment rate eased back to January’s 5.2% level – the lowest rate since September 2001. In addition, wage increases began to improve a bit. As usual, we need to wait and see what the trend is and not jump at conclusions based on one month’s numbers.

But it is not just jobs creating uncertainty about the economy. Although Newton may have concluded that what goes up must come down, we still are waiting for his law of gravity to be proved in the oil market. Right now, what goes up must go up even more and that is creating real hardship for many people and businesses. With prices for energy so high for so long, spending is being cut and that is lowering estimates for economic growth.

Worse, there is a growing belief that energy costs are slowly, but inexorably filtering into prices. Add to that the recognition that pricing power is beginning to appear and you have inflation worries starting to emerge.

The Federal Reserve recognized the potential for higher inflation when it met on March 22nd.  The Fed’s rate-setting committee did what was expected: It raised the funds rate one-quarter percent. But in its closely watched statement, it noted that “pressures on inflation have picked up in recent months and pricing power is more evident.”

So when we look out to the next few months, the two key issues of job growth and inflation need to be resolved. I wouldn’t be surprised if hiring in April was a lot better than in March. As for inflation, I suspect that it will continue to creep up and interest rates, especially longer-term rates such as mortgages, will have to start rising again.

Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank. Commerce Bank, “America’s Most Convenient Bank,” is a leading financial services retailer with 320 convenient stores in New Jersey, New York, Pennsylvania and Delaware. For more information about Commerce, please visit the company’s interactive financial resource center at commerceonline.com.