Even with few job gains, rates expected to rise

The Fed will wrestle this week with balancing low interest rates against jobs and oil prices.

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.

But, some economists are optimistic that the jobs report will turn around. In a survey of its members, the National Federation of Independent Business, finds that hiring plans are high. "The federation is surveying people who don't trade on the stock exchange, and they are creating jobs," says economist David Kotok of Cumberland Advisors in Vineland, N.J. "I am optimistic the job market statistics will get better."

Even within the disappointing July numbers, some economists found good signs. For example, the work week rose by 0.1 percentage points. "That's equal to a 200,000 to 300,000 gain in jobs," says senior economist Anthony Chan of JP Morgan Fleming Asset Management, which manages $772 billion in assets.

On Friday, the jobs report quickly hit the political trail. Democratic challenger John Kerry said, "The president keeps saying we've turned the corner. But unfortunately, today's job numbers further demonstrate that our economy may be taking a U-turn instead."

From the campaign trail at Bittersweet Farm in Stratham, N.H., however, Scott McClellan, a spokesman for the White House, said the employment number shows the economy is moving forward. "The unemployment rate did drop from 5.6 to 5.5 percent. It's well below the averages of the last three decades."

Mr. Chan says both sides are correct. "We are creating jobs, we're not worse off than last year, but it's disappointing we're not making more progress."

Wall Street is equally disappointed. An ebullient job market was supposed to take up the slack after the effect of the tax cuts diminished and the Fed increased rates. Now, many analysts are starting to reduce their forecast for economic growth.

Just last week, the government reported second quarter gross domestic product was a 3 percent annual pace, down from 4.5 percent in the first quarter.

"Now, it looks like the slowdown is spilling over to the third quarter," says Chan, who thinks it could be "reasonable" to see 4 percent growth for the whole year instead of the 4.6 percent forecast.

Whether that's enough growth to generate more jobs is not yet clear. "If productivity comes in at 4 percent, then you lose jobs," he says. "But if it drops down to 1 to 2 percent, then you might create 2 million new jobs, or about 166,000 a month."

Tuesday, the Fed will debate these issues. If it takes a more pessimistic view, it might not raise interest rates as much as Wall Street expects by year's end. If it thinks the economy is strong enough, it will stay on course. "They will have an agonizing decision," says Gramley.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK