The Economic Gods must be looking down on Alan Greenspan and smiling. Or is it the other way around? For the second consecutive month, the tone-setting employment report reinforced the idea that Federal Reserve pilot Greenspan was well on his way to achieving the elusive soft landing for the U.S. economy. A proxy for output, aggregate hours worked, rose 1.3 percent in the second quarter. Allowing for a modest increase in productivity, real gross domestic product is on track for 3 percent growth in the April-June quarter, according to economists at Bear, Stearns & Co. Some Fed officials, notably Gov. Larry Meyer, believe economic growth must slow to below its non-inflationary potential after many years of exceeding the speed limit in order to prevent inflation from accelerating. Undoubtedly there is neither the political will nor popular support to hoist the unemployment rate, which slipped 0.1 percentage point to 4 percent in June, to Meyer’s prescribed 5 percent to 5.25 percent. The headlines from the June employment report were a touch softer than traders’ expectations, sending Treasury note yields plummeting as another potential obstacle to an August “pass” from the Fed was removed. A mere 11,000 persons were added to the job roster last month; without the decline in census workers, private payrolls rose a respectable 206,000. May’s revised decline of 165,000 non-farm jobs still seems fluky in a labor market where the chronic complaint is the lack of skilled workers. In retrospect, the May dive looks like a payback from the inflated job creation 374,000 and 290,000 for private payrolls in March and April, respectively which may have been the result of unseasonably warm weather. In the first half of this year, the monthly increase in private payrolls averaged 177,000, down from 202,000 for all of 1999, according to the Bureau of Labor Statistics. In other words, the trend is approaching the 125,000 to 150,000 that would stabilize the unemployment rate at the current 4 percent, given labor force growth of 1 percent. Within the statistics were some interesting trends. Employment in finance, insurance and real estate fell for the fourth consecutive month in June. The cumulative year-to-date decline of 20,000 jobs comes on the heels of four and a half years of steady growth, according to the BLS. Declines in banking, mortgage banking and insurance more than offset the growth at securities firms. On July 7 it was reported that Merrill Lynch & Co., the nation’s largest brokerage, plans to eliminate 2,000 jobs, or 5.4 percent of its workforce. Is it an isolated example or the start of a trend at a time when a stock purchase no longer yields instant profits? Average hourly earnings rose 0.4 percent in June, which won’t sit well with the wage-inflation crowd. What is remarkable is that the year-over-year gain has been rock steady in a 3.5 percent to 3.8 percent range for the last year and a half. Even with slower productivity growth and a big increase in unit labor costs in the second quarter, “the year-over-year trend will still improve because we had such horrible numbers in the second quarter of last year,” says Bear, Stearns economist Melanie Hardy. Non-farm business productivity rose a scant 0.5 percent in the second quarter of 1999, while unit labor costs soared 4.5 percent. With the National Association of Purchasing Management’s weak June survey and last week’s employment report establishing a soft tone for the second consecutive month, the Fed can afford to stand pat at its next meeting on Aug. 22. Alan Greenspan has been around too long and is too familiar with the vagaries of data to take a snooze in that bathtub of his just yet. Like other economists, he is probably stunned by the degree to which all of the economic indicators have lost altitude simultaneously. There is generally an order to things, which has as much to do with psychology as economics. In general, it starts with the consumer, who gets a signal from higher interest rates that it’s becoming more lucrative to save than spend. Contrary to conventional wisdom, spending leads income, not the other way around. If income determined spending instead of merely furnishing the wherewithal to spend, how would GDP (a.k.a. income) ever turn around? Producers generally need to see a trend develop before adjusting output. One month of sluggish sales has to become a pattern before they are willing to risk cutting production. Lower output means less labor. Layoffs lead to a loss of confidence, a further curtailment in discretionary spending, and the circle repeats itself. Having said all that, it would be remarkable after years of begging for workers to see employers pare payrolls so quickly, especially since many of them had to provide incentives, including benefits and bonuses, to attract unskilled labor. Some economists aren’t convinced that the labor market has been quenched or the Fed demoted to inactive service. “There are two paths to more Fed tightening,” says Bill Dudley, chief economist at Goldman, Sachs & Co. “One is a rebound in demand. The other is proof that Meyer is more right than wrong.” By that, Dudley means that it will become apparent that the unemployment rate really is a full percentage point or so below the inflationary threshold. “We know that Greenspan is not an advocate of the NAIRU concept,” the idea of a non-accelerating inflation rate of unemployment, Dudley adds. So it’s one man’s intuition vs. another man’s religion. Don’t expect a final answer anytime soon. Caroline Baum is a columnist with Bloomberg News.