Recovery Continues, But Weakly

ECONOMISTS' fears of a dip back into recession were quieted by last week's economic reports.

On Friday, the Labor Department announced that the unemployment rate had fallen to 7.4 percent from September's 7.5 percent level. This fourth straight monthly drop followed the encouraging announcement Thursday that first-time unemployment claims had dropped to their lowest level in two years.

"On the face of it that looks like good news, but the fact is that the labor force is smaller than it was in June by 600,000 people," says Markley Roberts, the assistant director of economic research for the AFL-CIO in Washington.

The Labor Department reports that the economy actually lost 76,000 jobs in October. "Normally if that had happened with no change in the labor force, the unemployment rate would have been up a tenth," says Lacy Hunt, chief economist for Carroll McEntee & McGinley in New York. "But 314,000 people just quit looking for jobs."

"This just reinforces the picture of a slowly growing economy," says David Cohen, an economist with MMS (Money Market Services) International in Belmont, Calif. "It's decidedly sluggish by the standard of recoveries from previous recessions. But it's clearly not declining further."

A couple of months ago, some economists feared a renewed downturn. Last week's modestly improved numbers may have laid those concerns to rest. Factory orders bounced back by 1.1 percent. Some numbers up

Productivity rose 2.6 percent during the July-to-September quarter. And construction spending increased 1.3 percent in September. With production up, the Labor Department reported that the workweek was growing for current employees. But companies still were not hiring.

President-elect Bill Clinton said in a statement Friday that "while the slight drop in the unemployment number today is a step in the right direction, the numbers also sent a sign that our economy is still not creating enough jobs.... Creating new jobs and getting our economy moving again will be my top priority."

Similar statements by Mr. Clinton have sent tremors through credit markets that are concerned about increased deficit spending.

"I don't think the president-elect and his team know this," Dr. Hunt says, "but they may be already hurting the economy rather than helping it.... The bond market is waving a huge yellow flag.

"If we go back to the Carter presidency, the bond market began deteriorating the first business day of January 1977," Hunt says. "The Carter administration did not think it was a warning sign." Since mid-September, bonds have slumped and long-term interest rates have risen.

"That reduces housing activity, investment in plant and equipment, and expenditures for research and development," Hunt says. Other economists are not nearly as concerned about the effect of Clinton's plans. According to Mr. Roberts of the AFL-CIO, the best way for Clinton to restore confidence to the financial markets is to improve output and employment. The country "cannot go worrying about the psychology of the stock market and the psychology of bankers.... They just shouldn't be the arbiters of econo mic policy," he says.

Mr. Cohen adds another twist to the interpretation of the positive economic reports: "Usually any evidence of an uptick would be received poorly in the credit markets. But now there is an extra dimension. If the economy looks like it is improving on its own then maybe there will be less of a need for [deficit-financed] stimulus." California hit again

Of the 11 largest industrial states, only Ohio and California experienced a rise in unemployment. While Ohio's increase was small, moving from 7.1 percent to 7.2 percent, California's rate jumped from 9.4 percent to 9.8 percent. "Manufacturing was down 56,000 [jobs in October], including a drop in the defense category, and presumably California got its share of those," Cohen says.

The increase in construction jobs was a bright spot in Friday's report, with 20,000 workers added. Rebuilding hurricane-damaged structures in Florida has spurred new hiring.

"It's clearly a mixed bag throughout the economy," Cohen says, "but we're back on a slow-growth track."