Workers’ Delight; Wall St.’S Fright Good Employment News Shakes Stock Market

American workers found 348,000 new jobs last month - good news, except for people who work on Wall Street, apparently.

After Friday’s Department of Labor announcement that May job creation was twice as high as economists had expected, the stock and bond markets plummeted amid fears the strong economy could lead to inflation and higher interest rates. The Dow Jones industrial average dropped 85 points in the first half-hour of trading.

The stock market rallied by day’s end, with the Dow closing up 29.92 points to 5,697.11, although broader market measures posted losses. And the bond market remained weak, with the yield on the benchmark 30-year Treasury issue jumping to 7.04 percent from 6.9 percent.

“I think this was one of those wonderful illustrations in the difference between Wall Street and Main Street, the real world,” said James Annable, chief economist at First Chicago NBD Bank.

Unemployment rose slightly last month to 5.6 percent from 5.4 percent in April, only because the pool of workers swelled by 549,000 as the seasonal closing of schools and colleges sent thousands of new job seekers into the labor force.

Wall Street is worried because the increase in jobs could lead to a smaller labor pool and thus higher wages, then more spending, then increased demand for consumer goods, then inflation, said Michael Metz, analyst at Oppenheimer & Co. in New York City.

Gordon Richards, chief economist at the National Association of Manufacturers, blamed market reactions on “neurotic paranoia” among investors, stemming from unwarranted fears that inflation will flare up when the jobless rate drops below 6 percent for an extended length of time. Financial markets seem to “have a pathological fear of growth,” he said.

So far, the tightening labor markets have not been accompanied by any significant gains in wages.

The Labor Department said Friday that the average hourly wage rose 3 cents in May to $11.75.

“We think the addition of new jobs is a sign of solid economic movement, and now we think America needs a raise,” said Denise Mitchell, spokeswoman for the AFL-CIO. “We need to see some wage growth for working people who have been squeezed too long.”

Yet Annable said the Federal Reserve now has little choice but to raise interest rates to sustain growth and stave off inflation. Its Federal Open Market Committee, which sets U.S. monetary policy, meets July 2-3.

Higher interest rates make money scarcer and more expensive, which reduces borrowing and slows economic growth. That, in turn, can sink corporate earnings and stock.

“It’s not that they’re trying to dramatically slow down growth in the economy,” Annable said of the Fed. “It will reassert their credibility as inflation fighters. If not, long-term interest rates would grow dramatically higher.”

President Clinton, in a White House news conference, said the job report should not cause worries of inflation. “I believe it is a sign we can grow the ecomomy without inflation if our workers and our businesses are productive.”