Wait-and-see economy keeps jobless on edge

Temp hiring hints at recovery, but job growth isn't expected to match 1990s.

Here's the script for the economy: The nation's factories should be humming, business should be advertising for new workers, and backhoes should be digging the footings for new factories to spew out new products.

But with only five months left in the year, it's a matter of lights, camera, but very little action.

Most economists expect some stirring soon, given the amount of stimulus the economy is getting from the Federal Reserve and US government. They predict next month, or maybe the month after that, will be better.

In fact, some signs already point to improvement for the economy, but a key question remains whether faster growth will translate into many new jobs. From cheap labor overseas to factories at home that are able to do more with fewer workers, several factors could presage slower job creation than in the 1990s.

"The economy is not terrible right now, but the best that can be said is that it's partly cloudy," says David Wyss, chief economist at Standard & Poor's.

Proof of that came last Friday, when the government reported a the unemployment rate had fallen from 6.4 percent to 6.2 percent. The decrease was welcome, but came because fewer people were looking for jobs. Most analysts attributed this to teens failing to find work last month and heading for the beach. The statistics seemed to indicate a fair number of moms joined them. More important, the average work week diminished, and manufacturers continued to shed jobs.

"The labor market is as flat as a pancake and that is being optimistic," says Mr. Wyss.

In fact, the future may be a challenge as well. There is the possibility of a big strike at Verizon, which could push up the August unemployment rate. And the auto industry will be in heated negotiations with its unions. One of the major issues: how many parts will be made in China.

The stagnant jobs market will make it harder for President Bush as he travels this month fundraising and talking up his tax cuts. "So far he's said, 'Just wait and see, it will happen any moment,' " says Andrew Stettner, policy analyst at the National Employment Law Project in New York.

Economists believe some of this is starting to take place. For the second straight week, new unemployment claims were below 400,000. Above that level, the labor market is considered to be getting worse.

More 'help wanted' signs

Help wanted ads are rising across the country. For the past three months there has also been a surge of temp hiring - often a precursor to permanent hiring. And businesses are telling the Challenger Report they expect to make fewer layoffs in the future.

But even when the economy does start to create new jobs, economists have reduced expectations. In the 1990s, the economy added 200,000 jobs a month. "That's now ancient history," says Robert Gay, global head of fixed-income research at Commerzbank Securities in New York. "If we can get 100,000 a month, we might be fortunate at this juncture."

Even if the jobs picture doesn't improve a whole lot, experts believe the economy as a whole can show some improvement. One example: Last week, the Institute for Supply Management found that conditions such as new orders and backlogs are getting better. But for the 34th straight month, manufacturers said they would not be adding workers.

"Most of our members say manufacturing has bottomed out and is improving," says Daniel Meckstroth, an economist at the Manufacturers Alliance/MAPI, a trade group in Arlington, Va.

Some of that improvement showed in the government's report last week that the economy grew at a 2.4 percent pace in the second quarter, higher than expected. Although a lot of the growth came from the war in Iraq, economists also saw some encouraging signs for the future. For one, business let inventories run down. "Without the drag of inventory runoffs, the growth would have been 3.2 percent," says Sung Won Sohn of Wells Fargo Banks in Minneapolis.

Hope ... and challenges

Business will have to ramp up production to refill depleted stockpiles. Other data show companies beginning to spend more money replacing computers and software. Altogether, Mr. Sohn estimates this will make the GDP grow at a 4 percent annual rate in the year's second half, helped in large part by the Bush tax cuts, which will add 1.2 percentage points to second-half GDP.

While this might help in the short term, Mr. Gay is less optimistic over the long term. Erosion of jobs, he says, is undermining the nation's economic health. He estimates the US has lost 750,000 jobs permanently to lower-cost nations. "If they are lost permanently, we have lost jobs and income we can't replicate," says Gay. "I don't see the great new industry that is going to pick up the slack in the job market, and that is our quandary."

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