U.S. Unemployment Rate Plunges To Seven-Year Low Drop Increases Chances That Fed Will Boost Interest Rates

The nation’s unemployment rate plunged to a seven-year low of 5.1 percent in August, the government said Friday in a report hailed by President Clinton on the campaign trail.

Economists said the drop, from 5.4 percent in July, and a jump in average hourly wages increase the chances the Federal Reserve will raise interest rates to cool the economy.

Republican presidential challenger Bob Dole used the report as an opportunity to argue that high taxes are preventing Americans from enjoying the benefits of the improved job market.

August’s jobless rate, the Labor Department said, was the lowest since March 1989, when it reached 5 percent early in the Bush administration. Except for that one month, it hasn’t been lower since December 1973, nearly 23 years ago.

Labor Secretary Robert Reich beamed over a 6-cent increase, to $11.87, in the average hourly earnings of non-farm, non-supervisory workers. That followed a 2-cent drop in July and a record 10-cent gain in June.

Financial markets - which often fall on good economic news for fear it presages higher interest rates - shrugged off the unemployment figures. Although long-term bond prices dropped immediately after the report was released in the morning, they soon recovered. And the Dow Jones average of industrial stocks closed up 52.90 at 5659.86.

Both stocks and bonds had tumbled Thursday and economists said Friday’s rebound reflected relief that the unemployment report didn’t raise even more worries about inflation.

“The market did OK today, but over the long term this does not bode well for Wall Street,” said economist David Jones.

With Friday’s report, Federal Reserve policy-makers probably “are leaning toward a small tightening move at their next meeting” on Sept. 24, he said, predicting a quarter-point increase in the benchmark rate on overnight loans among banks, now at 5.25 percent.

However, economist Mark Zandi of Regional Financial Associates in West Chester, Pa., predicted a half-point increase. He said unemployment rates as low as 2 percent to 3 percent in parts of the Midwest are pushing up wages.

Separately, a survey of small firms by the National Federation of Independent Businesses showed 29 percent having trouble filling jobs.

“Unless they (Fed officials) act now, they’re going to have a big problem,” Zandi said. “The Fed doesn’t like to act right before an election … but I don’t think the election will stop the Fed from doing what it needs to do.”

The unemployment rate dip was particularly pronounced among workers age 20 to 24 - from 9.7 percent to 8.3 percent - and those 55 and older - from 3.8 percent to 3.1 percent.