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Economy creates 288,000 jobs

By FRANK SCHNAUE   |   May 7, 2004 at 2:05 PM
Corporate America went on a hiring frenzy in April as companies added 288,000 jobs to their payrolls, driving the overall unemployment rate down to 5.6 percent.

The Labor Department reported Friday the April job gains came following a revised gain of 337,000 jobs in March, which the government agency had originally reported as a 308,000 gain. The economy only created a paltry 46,000 positions in February.

Most economists on Wall Street were expecting non-farm payrolls to grow by only 170,000, while the unemployment rate was expected to remain at 5.7 percent.

Analysts noted that during the mature phase of an economic expansion, monthly payrolls gains of 150,000 or so are considered relatively healthy.

In the early stages of recovery though, gains are expected to surpass 250,000 per month.

Economists generally believe that the magnitude of the increase in March was the first of many.

April's gains brought the increase in the last two months to the most since March and April of 2000, but at the same time ignited speculation the Federal Reserve will now hike short-term interest rates by one-quarter percentage point at its next open-market committee meeting in June.

Wall Street had been expecting the central bank to hike the fed funds rate in August.

John Sweeney, President of the AFL-CIO, said, "The unemployment report brings encouraging news, but we still have a long way to go to climb out of the deep jobs hole that has consumed millions of Americans. We have not come close to erasing the huge jobs deficit created under the Bush Administration; we've lost 1.5 million jobs and we need to add about five million just to keep up with working-age population growth.

"Long-term unemployment is still a major problem with 1.8 million people unemployed 27 weeks or longer -- nearly triple the 660,000 in 2001. Job growth over the last eight months has been far below expectations, averaging just 139,000 jobs per month -- not enough to absorb population growth," Sweeney said.

The civilian unemployment rate is a lagging indicator of economic activity. During a recession, many people leave the labor force entirely, so the jobless rate may not increase as much as expected. This means that the jobless rate may continue to increase in the early stages of recovery because more people are returning to the labor force as they believe they will be able to find work.

Analysts noted the civilian unemployment rate tends towards greater stability than payroll employment on a monthly basis. It reveals the degree to which labor resources are utilized in the economy.

If ever there was an economic report that can move the markets, this is the one. The anticipation on Wall Street each month is palpable, the reactions are dramatic, and the information for investors is invaluable.

By digging just a little deeper than the headline unemployment rate, investors can take more strategic control of their portfolio and even take advantage of unique investment opportunities that often arise in the days surrounding this report.

The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they're getting paid and how many hours they are working. These numbers are the best way to gauge the current state and future direction of the economy. They also provide insight on wage trends, and wage inflation is high on the list of enemies for the Federal Reserve. Fed chairman Alan Greenspan talks about this data frequently and watches for inflation constantly.

By tracking the jobs data, investors can sense the degree of tightness in the job market. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall. No doubt that the only investors in a good mood will be the ones who watched the employment report and adjusted their portfolios to anticipate these events.

On Thursday Greenspan told a conference given by the Federal Reserve Bank of Chicago, "Even if interest rates rise, households may see only muted effects because it will take time for debt to mature and subsequently reflect higher interest rates."

"Even should interest rates rise materially further, the effect on household expenses will be stretched out. A couple of weeks ago, I indicated in testimony to the Congress that the outlook for the next year or two has materially brightened," Greenspan said.

"But the outlook for the latter part of this decade remains opaque because it is uncertain whether this transitional paradigm, if that is what it is, is already far advanced and about to slow, or whether it remains in an early, still vibrant stage of evolution," he said.

Earlier this week the Federal Reserve moved a step closer toward hiking interest rates for the first time since 2000, saying strong economic and jobs growth has defused the deflationary threat that preoccupied the central bank for a year.

The Fed's policy-making open market committee voted unanimously to keep the key federal funds rate at 1 percent, where it has been for the last 10 months. The central bank indicated the risk of deflation has passed, saying prices are now just as likely to rise as fall. Still, the panel said it is likely to be "measured" about raising interest rates because inflation still is low.

The phrase "likely to be measured" replaced an earlier formulation in which the committee said it "can be patient" about raising rates. Most economists don't expect the fed funds rate to climb above 2 percent this year.

Since the committee last met in mid-March, government statistics have shown a clear improvement in U.S. economic performance: economic growth accelerated in the first three months of 2004, and non-farm employers created jobs at an average pace of 171,000 a month. A key measure of inflation, meanwhile, rose to the top of the range the Fed deems desirable.

Under the circumstances, analysts said, the Fed was expected to wait until August 10 before it raises interest rates. By then the central bank will have four more months' worth of employment data -- enough to be sure that the surge in job creation in the first quarter of 2004 wasn't a fluke.

"Americans urgently need good, family-supporting jobs -- jobs with health care, pensions and good pay. Jobs in growing industries pay on average 20 percent less than the jobs in shrinking sectors," Sweeney said.

The latest report from the Labor Department showed employment in service-producing industries, which include retailers, banks and government agencies, rose 246,000 in April after jumping 255,000 in March. The increase was paced by a 123,000 rise in personal and business services, which include temporary-help agencies.

The report showed manufacturers added 21,000 jobs in April after adding on 9,000 in March. The manufacturing workweek slipped to 40.6 hours from 40.9 in March and overtime declined to 4.5 hours from 4.6 hours.

Peter Morici, Professor at the Robert H. Smith School of Business, University of Maryland, said, "The manufacturing number continues to point to problems. 21,000 sounds impressive but if that pace is sustained for a year, less than 10 percent of the jobs lost in manufacturing since 2000 would be replaced. 21,000 is just not a great number this late in the recovery or after losing three million jobs."

The government said average weekly hours worked for all employees held steady at 33.7 hours in April. Workers' average hourly earnings rose 0.3 percent, or 5 cents. Average weekly earnings rose to $525.38 from $523.70 in March.

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