Economic Reports Signal Continued Slow Growth National Unemployment Rate Falls, But So Do Leading Indicators

Fresh signs emerged Friday that the U.S. economy is stuck in first gear, growing at the slowest of speeds.

On the plus side, the Labor Department reported that unemployment fell in August to 5.6 percent from 5.7 percent a month earlier while employers added 249,000 new jobs, exceeding the Wall Street consensus forecast of a 145,000-job gain.

Separately, though, the National Association of Purchasing Management said its manufacturing index unexpectedly fell in August, indicating manufacturing may be contracting, while its price index plummeted. And the government’s index of leading economic indicators - intended to project U.S. business activity over the coming six months - fell 0.2 percent in July.

“The bottom line is that the economy is not speeding up,” said Mark Taborsky, who manages $280 million of bonds at Abacus Financial Group in Chicago. “We can look for lower growth over the next two quarters.”

That realization - along with a report from Columbia University showing the threat of accelerating inflation receded in August - helped investors overcome their concerns about the stronger-than-expected job growth.

Stocks rose. The Dow Jones Industrial Average closed up 36.98 points. The dollar, meanwhile, was little changed against other major currencies.

The Labor Department’s jobs statistics confirm the purchasing managers’ view that manufacturing is expanding slowly. Factories showed a gain of just 12,000 jobs in August after several months of losses.

Most of the job growth was in services, reflecting back-to-school hiring, while a slow rebound in manufacturing reinforces the view that the Federal Reserve may move in coming months to lower interest rates and boost the economy.

Services added 236,000 positions last month, particularly in temporary employment - which had been sluggish since February - and the medical field. Construction employment rose by 2,000.

An increase of 73,000 government jobs reflected the hiring of teachers and other school employees, analysts said.

The Fed lowered the overnight bank lending rate by a quarter point to 5 percent on July 6 - the first such action in three years. At a policy meeting Aug. 22, Fed officials took no immediate action to change rates.

Prospects are remote for a continued rebound in employment growth this year as businesses struggle to keep costs under control. “They’re afraid of being burned,” Peter Kretzmer, an economist at NationsBank Corp., said before Friday’s statistics were published.

For example, a planned merger of banks Chase Manhattan Corp. and Chemical Banking Corp. is expected to trigger 12,000 layoffs. Additionally, long distance provider MCI Communications Corp. has announced plans to dismiss 3,000 workers.

To be sure, there were some signs of a rebounding economy in Friday’s economic news.

The government reported that construction spending rose 2.0 percent in July, the largest gain since November 1993, as lower mortgage rates spurred home building. Housing is often the first sector of the economy to regain strength.

In an indication that consumers are ambivalent about economic conditions, the University of Michigan’s final consumer sentiment index for August rose, while its index of consumer expectations fell. “When you put it all together, it does suggest fairly sluggish economic growth going forward,” said Cynthia Latta, an economist at DRI/McGraw-Hill in Lexington, Mass.

The Labor Department’s report Friday also showed the July employment figure was revised to a gain of just 6,000 jobs, after initially being reported as a gain of 55,000 positions a month ago.

On the inflation front, there was reassuring news. Average hourly earnings - a gauge of labor costs - declined by two cents in August after rising by six cents during July. Average hours worked also declined, falling to 34.4 during August from 34.6 in July.

July’s unusually large increase in earnings may have been related to layoffs in manufacturing during that month. Most likely, lower paid, junior workers were furloughed while higher paid senior employees kept their jobs. That would pull average earnings higher, even if no workers received raises.

After the Fed spent most of last year and part of this year increasing interest rates to contain inflation, economic and employment growth have both slowed.

Over the last five months, the economy added an average of 100,000 jobs a month, down from a monthly average of 294,000 last year, government officials said.

Economic growth, meanwhile, has been running at an annual rate of about 2.5 percent so far this year, down from 4.1 percent for all of last year.