Dow tops 17,000 As Investors Look Past Recovery's Soft Spots

The U.S. economic expansion is entering its sixth year with the best stretch of job growth in almost a decade. Beneath the shiny exterior, however, lurk soft patches that worry economists and policy makers.

Investors on Thursday seized on robust jobs numbers–-not lingering soft spots–-and drove the Dow Jones Industrial Average past 17000 for the first time. The Dow closed up 92.02 points, or 0.5%, at 17069.26 in holiday-shortened trading.

Overall job growth in June showed businesses gaining confidence and shedding the caution that has defined the labor market in the five years since the recession ended. Employers added 288,000 jobs during the month and unemployment fell to 6.1%, the lowest level since September 2008, the Labor Department said Thursday, pushing the rate closer to what many economists consider full employment.

Yet those gauges don't capture other weaknesses in the employment spectrum. Nor do those figures explain the mysteries of an economy that has been struggling to gain enough velocity to shake off its many ailments long after the recession ended.

Consumer spending remains weak, a consequence of a labor market delivering new jobs but skimpy wage growth. And the share of Americans working or looking for work–-the so-called labor-force participation rate–-is near its lowest levels since the late 1970s, despite steady hiring.

PMW Technologies Inc., a supplier of human-resources software called PeopleMatter, highlights the divide in the economy. The Charleston, S.C., firm has added 50 higher-paid software engineers and salespeople over the past year, boosting the company's benefits package to attract and retain high-skilled workers. It plans to add 100 positions over the next year, bringing its total head count to 250.

Yet the company is witnessing the choppiness among its clients in the retail and food-services sectors. "The economy's very fragile," said Chief Executive Nate DaPore. "We're in a muddle-through economy. The nature of the latest labor-market gains presents a challenge for Federal Reserve officials: Improvement in top-line metrics such as unemployment and inflation, both of which are nearing the central bank's targets, is spurring speculation about earlier-than-expected rate increases even though gauges under the surface show the recovery remains soft.

Other data show the broader economy is still struggling to rebound from an unusually sharp decline in the first three months of the year. Harsh weather and a drawdown of business inventories contributed to the fastest decline in economic output in five years, a contraction at an annualized 2.9% pace.

Fed officials must weigh that weakness against an unemployment rate falling faster than they projected. Last month, Fed officials projected the U.S. jobless rate would be a little higher than 6% at the end of 2014, basically where it stands after Thursday's report.

Also flashing on the Fed's dashboard: The number of people working part time because they can't find full-time work rose, and the share of the population either working or looking for work remains around 30-year lows. June's labor-force participation rate was 62.8%, unchanged from the prior month.

And while U.S. workers' earnings have been climbing about 2% annually–-just enough to cover inflation–-wages show few signs of breaking out of that range as an abundance of idled labor allows firms to keep payroll costs contained. "Slack in the labor market...is dwindling, but we're not seeing that on the wage side yet," said Alan MacEachin, an economist at Navy Federal Credit Union.

Amid this weakness, hopes for a big second-quarter rebound are now beginning to wither. Forecasting firm Macroeconomic Advisers on Thursday lowered its estimate of second-quarter growth by 0.6 percentage point to an annualized 2.7% after new trade data showed stronger imports than expected, subtracting from domestic output. J.P. Morgan Chase pulled its estimate down to a 2.5% pace from 3%.

Other economists' second-quarter forecasts are running only slightly ahead of the 2.4% pace averaged from mid-2009, when the recession ended, through the end of last year. While import growth hints at underlying domestic demand, separate Commerce Department data showed household spending in May rose a lackluster 0.2%. When adjusted for inflation, spending actually declined for the month.

Indeed, Americans are facing higher prices this year for food and energy, including gasoline. Higher costs for those staples can limit discretionary spending at restaurants, malls and online.

The jury is still out on whether an improving job market is leading shoppers to spend more. Wal-Mart Stores Inc. Chief Executive Doug McMillon told analysts during a meeting this past week that the discount retailer wasn't seeing much of a difference compared with 90 or 180 days ago.That diverged from remarks made by Kroger Co. in June that its customers are "exhibiting less cautious spending behavior," according to CEO Rodney McMullen. "More customers perceive the economy to be in recovery," as shoppers spend more on things like premium pet food and organic products, he said.

Likewise, Molson Coors Brewing Co. CEO Peter Swinburn told investors recently that the past five years were challenging for its core drinkers in North America but that the company is now starting to see the "green shoots" of recovery. The two views may have to do with the circumstances facing different customer segments. The low-income core that makes up Wal-Mart's base are still dealing with job losses and cuts to government benefits. They are recovering slower than wealthier shoppers who have benefited from rising home and stock prices, William Blair analyst Mark Miller said.

Another factor restraining consumer spending is likely that much of the new hiring is concentrated in low-wage fields. The retail industry added over 40,000 workers last month and hospitality businesses payrolls rose by 39,000. Higher-paying sectors lagged behind. Manufacturing added 16,000 new jobs and construction added 6,000. The public sector was an exception. Government employment grew by 26,000 last month and is up by 54,000 so far this year, following a five-year downsizing.

Wayne Slack of Chandler, Ariz., is one job seeker who is holding out for a better position. After losing a supervisory role in aerospace manufacturing, he's been unwilling to accept a lower-paying position. Instead, the 47-year-old enrolled in community college after being told his computer skills were lacking. "I'm willing to go backwards a tad, but I'm not willing to take an $8 pay cut to stand in front of a machine again," he said.