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Office of the Press Secretary

For Immediate Release May 6, 1994
                            PRESS BRIEFING

The Briefing Room

2:12 P.M. EDT

MS. MYERS: The following briefing with Secretary Reich and Dr. Tyson will be on the record and on camera for the entire briefing. Then I'll come back and answer any questions you might have, with the usual ground rules. So, Secretary Reich.

SECRETARY REICH: This month's employment report gives us a lot to crow about. We've gone from a jobless recovery to a jobs recovery, and now we are in a jobs expansion. There is no doubt about it.

While there are certain regions of the country -- particularly New England and California -- that still have not fully made up for the jobs lost during the recession, most areas of the country have now fully made up for all the jobs lost, and are now building new jobs beyond those jobs that were lost.

On our journey to eight million new jobs over four years, we are in fact ahead of schedule. Payroll employment expanded by 267,000 jobs last month. Employment is now increasing in construction, manufacturing, as well as in services. And the unemployment rate measured under the new bases declined slightly to 6.4 percent.

The economy has now created -- even since the first of the year -- one million net new payroll jobs; or more precisely, over the last four months, 978,000 -- with almost all of the employment growth occurring in the private sector. Employment is expanding in the heart of the economy, the basic building blocks of the economy -- manufacturing and construction. Employment in manufacturing has increased by 101,000 over the last seven months. Now, this is the first time in a decade that we have had seven consecutive months of increases in manufacturing employment. Construction employment is up 146,000 over the last two months. And this is the biggest two-month increase in construction in over a decade.

When jobs are up and productivity is up, as we've experienced over the last year, you have the capacity for more people to work and earn more in real terms without generating excessive inflationary pressures. But we must remember that 8.4 million Americans remain unemployed. And more than one-fifth of the unemployed are long-term unemployed -- they've been out of work for more than six months; 4.8 million Americans are also involuntarily part-time workers. They would rather be having full-time jobs, they can only get part-time jobs.

So while the picture is extremely good, we still have a way to go. There is slack in the labor market, and we, over the next months, certainly over the next years, we are aiming and continue to aim very high. Laura.

DR. TYSON: Well, I have very little to add to that. Let me just emphasize that what we have seen in today's report confirms our view that the economy is enjoying steady, solid growth with modest inflation. More and more Americans are enjoying the benefits of a broad-based and balanced economic expansion, more job opportunities and rising living standards.

I will point out that in this period of time when, since the beginning of the year, we have created almost a million new jobs, our average hourly earnings have increased 2.6 percent over the last year -- about the same as the rate of inflation.

Taken together with other recent reports on the economy, today's employment report suggests that inflation remains modest. Continued strong productivity growth is moderating upward pressure on prices. The administration, like most private forecasters, predicts only a slight uptick in inflation as the economy continues to expand, generating more job opportunities for more Americans.

Thank you.

Q Dr. Tyson and also Secretary Reich, why is this wonderful news such bad news in the financial markets. Why are they going crazy on Wall Street when you are exalting here?

DR. TYSON: Would you like to start?

SECRETARY REICH: Oh, please, be my guest.

DR. TYSON: You'd like me to start on it? (Laughter.)

Well, it is always hard -- I think it's impossible to outguess the market, and I'm not really going to try. I think what we try to do in these announcements is try to give our sense of what the economy is doing. I would say that to those market participants who might have a concern about inflation -- again, I want to emphasize that what this report is showing us is if you look over the past year, earnings -- average hourly earnings -- have only increased about the same rate as inflation.

We have had strong productivity growth over the last year. We do have a unit labor cost picture, which actually looks very good. In terms -- if you compare this period of economic expansion to previous periods of economic expansion in this economy, unit labor costs are below trend. So we really have a very good cost situation, and a good competitive situation. And I guess I would point out just what the Beige Book -- the Federal Reserve Beige Book -- said this week about the economy; that the economy is growing solidly, jobs are being created, it is a broad-based expansion both regionally and across the sectors of the economy, and competition and productivity is keeping price pressures modest.

Q But the market, obviously, expects the Fed to raise interest rates. That will make debt service more expensive. Would that threaten the recovery, as analysts expect, if the Fed does raise interest rates?

DR. TYSON: Well, I don't know what the -- first of all, just as we don't outguess the market, we certainly don't outguess the Federal Reserve. I think the -- in thinking about the effects of interest rate changes on the economy, you need to keep in mind two factors at once. To the extent that the economy is actually growing more rapidly, or has more momentum and strength than was anticipated, one would anticipate higher interest rates. That is, you have to think of the interest rate as a price here -- it's the price of credit, it's the price of loans. And in a growing economy, in a robust economy with momentum, demand for credit does increase and that should increase the price of credit somewhat, without in fact slowing down growth. That's the first factor.

The second factor is that higher interest rates by themselves do tend to slow some forms of spending down. And there are important forms of spending which are partly sensitive to interest rates. They're sensitive to other things as well. So I think that our view right now is that one is likely to see a year -- this year -- of solid economic growth at around 3 percent with somewhat higher interest rates than we had initially forecast. We have not come out yet with a revised forecast. And so what I'm suggesting is, it's possible to imagine that this year will end up being a year with somewhat higher interest rates than anticipated, but also an expansion in the range of 3 percent.

SECRETARY REICH: I'm not going to comment on the paper economy, but I can tell you from a standpoint of the real economy, things are going very well. The fundamentals are right on track. And if you look at the number of new jobs being created, it's about 237,000 per month on average over the last six months. We've had some fluctuations. You remember in January, we actually had a minus 31,000. And then there was that -- we made up for a lot of that last month -- I mean, in March -- 464,000. We've now settled down somewhat -- 267,000. But overall, we are on a very steady path, and that is good news for working Americans.

Q This is for whoever wants to answer the question. Nevertheless, long-term interest rates, which I know the administration has put more emphasis on, they've increased far more than short-term interest rates. Is there any concern that they have now risen to a level where, not necessarily immediately, but six months, nine months down the road, they are really going to bite and slow things down?

DR. TYSON: Well, the first thing to say is your question points out an important fact that needs to be kept in mind when talking about interest rates all the time. And that is that interest rate changes today -- you don't really begin to see their effects on economic performance until significant number of months later; really, nine to 12 months later. So we really -- at this point, it's hard to -- when we talk about interest rates we have to think ahead like that, and think where do we think the economy is going to be at that point.

On the issue of long-term interest rates, let me say it is the case that if you look at the increase in long-term interest rates that has occurred relative to the increase in short-term interest rates that has occurred from the beginning of this year, the increase in long-term interest rates is a lot larger than would have been predicted by other comparable periods in U.S. economic history -- or would be predicted on the basis of econometric analysis.

Many forecasters actually speculate that that might mean at some point later in this year there might be some easing of longterm interest rates. I think it's -- I said many forecasters actually are speculating with the possibility that long-term interest rates by year's end may be somewhat lower than they are right now. I think one should keep in mind that it is probably unwise to take one day's long-term interest rate and project it out through the end of the year without thinking about the various factors that might cause it to change between now and then.

Q But clearly, long-term rates -- at least at the 30 year level and now also at the 10 year level -- have been above seven percent now for more than just a day. Is that going to have some kind of a slow-down effect several months from now on things like housing and --

DR. TYSON: It's really the answer I just gave, which is, by themselves, higher long-term interest rates would exercise a slowing affect on the economy. You have to hold that against the possibility that the momentum in the economy is greater than anticipated, and when those two things come together, they offset one another and you end up with a growth for the year of about 3 percent.

Q Given the rosy picture you present today, was the Senate right last year in killing the economic stimulus package?

DR. TYSON: Now, I've answered this here before, and I think that the answer that I've used is the answer that I think is the correct one. The stimulus package was an insurance package. When you buy insurance, you're insuring yourself against a risk. You're not sure that the risk will be realized.

When the stimulus package was proposed, most people looking at the economy felt there was significant downside risk to the recovery; that it was not a solid recovery. The unemployment rate at that point was above 7 percent. There had been a very long period of sub-par economic recovery. It seemed a sensible strategy to put an insurance policy in place. And of course, after the fact, we can say, well, it doesn't look like the insurance was required.

Insurance is something you buy in advance, and this economy certainly would not have been harmed by the economic stimulus package.

Q Could you address the situation in California? The jobless rate, according to today's statistics, jumped a full point there while the rest of the country goes in a better direction. The administration has put a lot of effort into peacetime conversion and all kinds of other things to try and resuscitate that economy over there. But this month's figures don't show any reason for much optimism.

SECRETARY REICH: I would be very weary about using month-to-month state employment figures. It's much more accurate to use a rolling average. California is trailing the rest of the country by about a year in terms of moving from a jobless recovery to a jobs recovery to a jobs expansion. Northern California is about on par with the rest of the country. Southern California is way behind. But I would not place very much credence on today's data at all.

Q So you see California ultimately moving in a positive direction, although on a belated schedule. Is that what you --

SECRETARY REICH: I would say -- and again, predictions are always hazardous -- but California seems to be about a year behind, with Southern California being in the most serious difficulty. Given defense downsizings, given obvious some of the other aerospace industry effects down there.

Q You spoke of interest rates being a price, though perhaps not in the way I'm going to attempt to use it now. Is the growth in the economy sufficient for the interest rate increases to continue? In other words, is it growing fast enough that the Fed's actions, which you continue to say -- by saying inflation is well under control, you continue to suggest that perhaps it may not need to continue to raise interest rates. Is the economy growing fast enough that the rate hikes don't really matter?

DR. TYSON: There are a couple of parts to your question. First of all, I want to say that by suggesting now that inflation is modest -- which I would think is a correct reading, and I think is a consistent reading with what most private forecasters would say and what the Fed Beige Book says itself -- any statement to that effect is really should not be interpreted as either an endorsement or a criticism about Fed policy. I want to make that absolutely clear.

One could take the view that inflation is modest now, but there might be some concern it would uptick later. Now, our view is, we've made it clear that this economy we expect to expand this year at a solid rate; and that as that expansion continues, there may in fact be a slight uptick in inflation. I mentioned that in my opening statement.

It is important to point out that as of right now -- and we're in May now -- if you look at the CPI, the rate of growth of CPI inflation this year is less than it was in the second half of last year. It's less than it was in the first half of last year. It's less than it was for all of 1993. So, in fact, as of May 5th-6th, we are at a CPI inflation rate for the year which looks very comfortable. And indeed, any uptick this year is going to have to occur after now, because we haven't seen it so far.

The other thing I would point out -- so I want to start with that. Having said that, so that people will understand I'm really not trying to -- I'm trying to analyze the economy rather than endorse or criticize Federal Reserve policy. Let me say that we are going to be redoing the forecast. We will ask ourselves exactly the question you asked yourself. I don't want to predict our answer right now. My sense right now is that we feel quite comfortable with our growth forecast for the year. And I would not anticipate any significant adjustment in that growth forecast.

And that suggests that in this offsetting factors that I talked about -- somewhat stronger-than-anticipated growth and higherthan -anticipated interest rates -- that the net effect of that on the economy might be to continue growth at 3 percent.

Thank you.

END2:28 P.M. EDT