3 August 2001, 17:52 FOCUS Job market now less risk to US GDP growth; Fed still to cut 25 basis pts
-- by Christopher Anstey ----
WASHINGTON (AFX) - A smaller than expected drop in US non-farm
payrolls shows that labor market deterioration is now less of a risk
for US GDP growth going forward, but the Federal Reserve is still
likely to ease another 25 basis points later this month, analysts said.
"A concern had been that the industrial sector's decline would
spill over into the service sector (which) hasn't turned significantly
negative. That's an important sign," said Richard Rippe, chief
economist at Prudential Securities.
Stanley Shipley, senior economist at Merrill Lynch, said "the fear
is that with sharp job losses, that would hit (consumer) confidence.
But it doesn't look like that's happening."
The Labor Department earlier said that non-farm payrolls fell
42,000 in July, while the unemployment rate stayed at 4.5 pct. Payrolls
for June were revised up to show a loss of 93,000, less than the
initial estimate of a fall of 114,000.
This shows that non-farm payrolls have lost an average of 31,000
jobs for the past three months, analysts noted, which is about half the
three-month average in June, of 72,000.
Some analysts said the US job market's decline may now be bottoming
out.
"There are some signs we've seen the worst," Shipley said, although
he cautioned that "this does not mean strength."
Ian Shepherdson, economist at High Frequency Economics, said it
"looks like the worst of the worst is over," in a research note.
David Orr, chief economist at First Union Corp, noted another
positive sign in the report was the growth in the overall labor force,
which expanded by 25,000.
In previous months, the unemployment rate had held fairly steady
only because the size of the labor force was shrinking, as people gave
up looking for jobs or retired, he said.
Meanwhile, outside of the manufacturing and temporary help sectors,
which have been weak for some time, the private sector actually created
18,000 jobs, Orr said.
"This is one of the reasons that the general populace has not felt
the pain (being portrayed in the media)," Orr said.
The significance of this slower slope of job losses is that labor
market deterioration is not likely to undermine consumer confidence
levels, which would be more likely to detract from consumer spending.
Consumer spending, though it has been growing sluggishly, has been
one of the positive contributions to US GDP during the sharp slowdown.
"With consumer spending accelerating, and inventories building
(after pronounced draw-downs), that's how you get a cyclical pop-up in
growth," Shipley explained.
The moderate pace of job losses in July upholds that scenario, he
said.
For the Federal Reserve, the report still shows a declining labor
market, however, and argues in favor of a 25 basis point reduction in
the key federal funds rate at the next policy meeting, on Aug 21.
Some creeping market expectations of a larger cut are likely to be
disappointed, analysts said.
"The notion of more aggressive easing is not something that these
data point to," Rippe said.
Orr said the report "removes any likelihood of 50 basis points,"
sticking with his forecast of a 25 basis point reduction.
Several analysts cautioned that although the worst may be over for
the job market, the unemployment rate should still rise in coming
months, on the back of the sharp economic slowdown.
"Personally, I think that is unavoidable," Orr said.
Robert McGee, chief economist at Tokai Bank in New York, expects
the unemployment rate to rise to 5 pct "early next year."
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