Even with few job gains, rates expected to rise

So far this summer, the job market is the economy's weakest link.

It is a politically charged issue - how to create new jobs is the question that almost defines the two candidates. The stock market, stumbling all summer, is trying to come to terms with the effect of higher oil prices and few jobs. And, the Federal Reserve, which meets Tuesday, is still in the process of trying to raise exceptionally low interest rates.

While the Fed is expected to increase them by a quarter of a point this time, any further weakness in hiring may make the Fed reconsider its goal of gradually increasing rates the rest of the year.

"The economy does not look to be falling apart," says Lyle Gramley, senior economic adviser at Schwab Soundview Capitol Markets in Washington. "But, if the Fed indicates it thinks the soft patch might continue for a while, it will give them a chance to step aside in September," says Mr. Gramley, a former Fed governor.

However, Gramley cautions that the wild card is higher energy prices, which are draining off consumer purchasing power. "You can never be sure the economy will snap out of it."

The latest sign of the weak job market came on Friday when the Labor Department in its payroll survey of business reported that there were only 32,000 jobs created in July. At the same time, it reduced the number of jobs created in June to 78,000.

"Clearly that [July] number is surprising and shocking given the expectations for up to 250,000 jobs created," says Robert MacIntosh, chief economist at Eaton Vance Corp., an investment firm in Boston. "But it's not as if we are heading for a recession. We may be just shifting to a 2.5 to 3 percent annual growth from a 3.5 to 4 percent growth rate."

In fact, the unemployment rate slipped from 5.6 percent to 5.5 percent, its lowest level since October 2001. That rate is based on a survey of households and it indicated a gain of 629,000 jobs. It often picks up small-business job gains not captured by the payroll survey. Federal Reserve chairman Alan Greenspan has indicated he considers the payroll survey to be a better gauge.

What the latest numbers show is that big business seems reluctant to hire because of uncertainty in the marketplace. Retailers are laying-off sales clerks since high fuel prices are sapping consumer pocketbooks. And, with interest rates higher, fewer people want to refinance their homes so mortgage companies are handing out pink slips.

Rick Cobb, executive vice president of Chicago outplacement company Challenger, Gray & Christmas, says the July numbers weren't surprising. The firm found an 8.1 percent increase in layoff announcements and a 30 percent drop in hiring. "The economy seems to be taking two steps forward and one step back and last month was a step back," he says.

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