WASHINGTON – The best hiring market in five years should limit the damage from inflation and position the economy to thrive in the second half of the year.
Higher food and gas prices are threatening to slow growth this spring. But economists say the drag from inflation will likely be only temporary. Commodity prices are easing. Gas prices could follow in the weeks ahead.
"We are going to see the economy picking up steam," said Joel Naroff of Naroff Economic Advisors, who is among many economists who think gas prices will taper off. "Lower energy prices will give consumers more confidence to spend, and higher consumer spending will give businesses more confidence to hire and invest."
The nationwide average for a gallon of gas has jumped by more than a dollar in the past year, though it leveled off the past week slightly below $4 a gallon. And consumers are paying more for groceries, after the biggest monthly spike in food prices in nearly three years.
Surging prices for necessities, like gas and food, were the main reason why sales at U.S. retailers rose 0.5 percent in April. It was the 10th straight monthly gain. But excluding sales at gas stations, the increase was a slighter 0.2 percent, the Commerce Department said. And grocery store sales rose at triple the rate from March.
Economists have expressed concerns that those higher prices could leave consumers with less money to spend on discretionary goods and services, like cars and clothing, furniture and vacations. Those are the kinds of spending that help power the economy and embolden employers to hire.
But businesses felt confident enough in April to add 268,000 net jobs. It was the biggest monthly hiring gain in five years. Over the past three months, companies have added an average of 250,000 jobs a month — the best hiring stretch since a year before the recession began.
And the number of people seeking unemployment benefits dropped last week after a temporary spike in April, the Labor Department said Thursday.
The optimism is catching on with ordinary Americans. An Associated Press-GfK poll shows that more than two out of five people think the economy will improve. A third think it will stay the same. Nearly a fourth think it will worsen. The results mark a rebound from a more pessimistic attitude last month.
Businesses will keep adding roughly 200,000 jobs a month for the rest of the year, economists predict. That should slowly reduce the 9 percent unemployment rate and put more money in consumers' pockets, on top of a cut in workers' Social Security tax that took effect in January.
Companies did pay more in April for raw materials and factory goods. That was mainly because energy prices jumped for the seventh straight month.
The Labor Department said its producer price index, which measures prices before they reach consumers, has risen 6.8 percent in the past 12 months. It's the sharpest increase in nearly three years. But putting aside volatile food and energy prices, "core" wholesale prices have risen only 2.1 percent.
There have been signs of relief. Commodity prices have dropped in recent days, hinting that inflationary pressures could cool in the coming months.
Oil prices ticked up slightly Thursday to near $99 a barrel. But that's still down from nearly $114 a barrel last week. Corn prices fell sharply Wednesday and were little changed on Thursday.
Paul Dales, an economist at Capital Economics, said the wholesale price index could peak this spring at 8 percent over 12 months. But it wouldn't stay that high for long.
"With commodity prices now falling, both producer and consumer price inflation are likely to drop sharply in the second half of the year," Dales said.
That closely matches views previously expressed by Federal Reserve Chairman Ben Bernanke. He and other Fed officials have said that rising energy and food prices are temporary and unlikely to cause significant inflation.
Many companies are eating the higher wholesale costs, rather than passing them on to consumers. The consumer price index has risen 2.7 percent in the 12 months ending in March — far below the gain in producer prices. The government will release April's consumer price figures on Friday.
In another sign of business confidence, many companies are stocking up in anticipation of stronger sales later this year. Businesses increased their stockpiles of goods for the 15th straight month, Commerce said Thursday. When businesses stock up, they order more factory goods. That helps boost job growth.
"Hiring looks good through the summer," said Harry Griendling, chief executive of DoubleStar Inc., a consulting firm that specializes in recruitment. Companies are reporting better sales. And many have squeezed all the work they can get out of their existing employees, he said.
"Now, they just need people," Griendling said.
Kohl's Corp., a mid-priced department store chain, said Thursday that it is building up its online business. The company said it will open its third distribution center, in Edgewood, Md., in July, creating 1,200 jobs over the next three years.
The unemployment rate has dropped nearly a full percentage point since November. Still, it remains high at 9 percent, and 13.7 million people are unemployed.
The number of people seeking unemployment benefits last week dropped by the most in more than a year, the Labor Department said. The decline comes after layoffs had increased in three of the previous four weeks.
Carl Riccadonna, an economist at Deutsche Bank, said the "labor market is picking up traction" and applications for unemployment benefits should fall below 400,000 in the next couple of weeks. That could translate into a job gain of as much 300,000 in May, Riccadonna said.
More jobs are critical to boosting consumer spending, which accounts for about 70 percent of economic activity.
The overall economy grew at a 1.8 percent annual rate in the January-March quarter. That was weaker than the 3.1 percent growth in the previous quarter.
But upward revisions to February and March retail sales have caused many economists to expect the government's next estimate of January-March growth to be closer to 2.3 percent.