Job Machine Slows - Blame El Nino, but Watch Asia

Stock market flirts with Dow 9000. But Japanese economy looks shaky.

The American job machine is slowing and that could be a sign that the galloping economy as a whole is moderating its pace.

If the economy continues to catch its breath, say economists, that should help keep interest rates on home mortgage and car loans low. And given growing concerns about Japan's economy, it's less likely now that the Federal Reserve Board would be tempted to raise interest rates.

This prospect propelled the Dow Jones Industrial Average up 2.1 percent for the week to close Friday within a whisper of 9,000.

On Friday, the market briefly went over the benchmark after the government reported that the March unemployment rate rose 0.1 percent to 4.7 percent. More importantly, the nation's payroll shrunk by 36,000 workers and the growth of average hourly wages - a clue of future inflation - dropped by 50 percent.

The latest numbers, economists say, illustrate that the economy may have been overperforming because of the El Nio-induced warm weather in January and February.

"Because of the warm weather a lot of people who otherwise would have been hired in March were hired in January and February," says Lyle Gramley, a consulting economist at the Mortgage Bankers Association and a former governor of the Federal Reserve Board.

Keeping an eye on Asia

The numbers, however, will also give the Fed some more time to assess the US economy, especially with some renewed concern over turmoil in Asia. "The headlines suggest the Fed has time to wait to see what Asia does before moving," says David Wyss, an economist at DRI/McGraw-Hill in Lexington, Mass.

The news from Asia is not good. The South Korean currency is down 20 percent in the last month - back to the levels that prompted the IMF to become involved. At the same time the Japanese stock market and the yen have fallen sharply. "There is a lot of renewed concern about the health of Asia," says Scott Grannis, chief economist at Western Asset Management, a Pasadena, Calif.-based money management company with $40 billion in fixed-income assets.

In fact, President Clinton issued a warning Friday to the Japanese that they needed to take action to prevent their economy from sliding further south.

Since 1992, the Japanese have spent $560 billion to kick-start their economy without much success. "Their economic system is failing," warns Sung Won Sohn, an economist with Minneapolis-based Norwest Corp., a financial services company. "Structural changes are needed; too much government intervention misallocates resources and protects industries from foreign competition."

Mr. Clinton's remarks came a day after Norio Ohga, the chairman of consumer electronics giant Sony Corp., made unusually blunt comments about his country's economy. "The Japanese economy is on the verge of collapsing," Mr. Ohga said. "If the economic situation continues to decline ... this will no doubt have a damaging effect on the world economy."

He urged the government to stimulate consumer demand, and said that simply cutting taxes wouldn't be enough. "Even the US economy will not be able to maintain its healthy state" if Japan's economy continues in its slump, Ohga warned.

The first signs of the Asian turmoil are starting to show up in US economic reports. Companies involved in the export of durable goods such as computers are reporting canceled orders. But economists still expect the slowdown in Asia to take only 0.5 to 1 percentage point off the US gross domestic product this year.

"It's a pretty good guess that the negative effects on exports will be over by mid-year," says Mr. Gramley.

Inflationary pressures?

Once the effect of the Asian crisis ends, economists will go back to worrying about the shortfall in US labor. Despite the rise in unemployment, Mr. Wyss is concerned that the US is running out of people to hire. "The biggest drop in hiring was for restaurants and that's pretty much the lowest paying jobs," he says.

Instead, he points out that job market is still so tight that the unemployment rate for college graduates has dropped to under 2 percent. "People on welfare, even those who have been out of work for a long time, are finding jobs," says Wyss.

Contention in Fed ranks

Gramley says there are also signs that productivity improvements are slowing. He says this will feed more wage pressures through to unit labor costs. Such a development, he warns, would certainly alarm the Fed. He says this past month's Fed meeting - when the central bank left interest rates unchanged - was contentious with some members arguing for an interest rate hike.

"My concern is that if the Fed tightens and corporate earnings falter because of poor productivity, the stock market could be exposed to a significant downturn," says Gramley. But this could be down the road since Gramley also expects the second quarter economy to be weaker. The Fed will certainly not tighten interest rates until it sees what happens in Asia. "We don't want to upset confidence there," he says.

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