By Russell Gold
Staff Reporter of The Wall Street Journal
The U.S. job market's seven-month collapse appears to be over, adding to growing optimism about an economic recovery.
In recent weeks, the consensus among economists has been that unemployment would continue to rise, even as economic growth returns. But on Friday, the U.S. Labor Department reported that employers added 66,000 more jobs in February than they cut, the first gain since July and the most sizable gain since February 2001.
The unemployment rate fell to a seasonally adjusted 5.5% from 5.6%, adding evidence that it may have peaked at 5.8% in December. If so, this would run counter to predictions, by the Federal Reserve Board and others, that the rate would reach 6% this year. To be sure, some economists argue that the Labor Department's numbers are misleading owing to one-time factors, such as the warm weather and auto workers returning from furloughs, and are subject to revision. But there is mounting evidence that unemployment may have stopped rising.
Factories are asking their employees to put in longer hours again, a sign that additional hiring is probably not far off. Manufacturing workers, who were among the hardest hit by the recession, worked an average of 40.7 hours a week in February, up from a low of 40.3 in November, the Labor Department reported. Initial claims for unemployment insurance are down, after smoothing out weekly fluctuations, another sign of a stronger job market ahead. "It looks to me like we have a real genuine turn, and I wouldn't be surprised if 5.8% is a peak," says Mark Vitner, senior economist at Wachovia Securities.
Still, few economists are predicting companies are poised to go on a hiring binge. "Firms are very focused on getting their bottom line up, which means they will go light on hiring and capital spending for a while," says Robert Gay, global head of fixed-income research at Commerzbank Securities. He expects the unemployment rate to remain about 5.5% as a revived economy creates jobs, but the labor force also swells as workers once discouraged by the lack of hiring re-enter the job market. In February, the labor force expanded by 821,000, suggesting this re-entry is already taking place.
What's more, other recent data suggest that companies are emerging from the recession more productive than ever and therefore able to get more output without adding workers. Some economists tempered the optimism by saying the latest employment numbers could be a fluke. Indeed, the Labor Department said much of the 66,000 increase in nonfarm payroll came from favorable weather that boosted construction employment, and automobile workers returning from temporary layoffs. The data showed a net 58,000 jobs were added in retail, but economists say that faulty seasonal adjustments by government statisticians may have inflated this number. In addition, after the job numbers were released Friday, Kmart Corp. announced plans to close stores and eliminate 22,000 jobs. Overall, the Labor Department said, manufacturing payrolls continued to decline, although job losses decelerated in February. Employment in the services industries grew for the third consecutive month. Traditionally, the jobless rate continues to increase in the early stages of an economic recovery. It did take 15 months for the unemployment rate to peak, at 7.8%, after the last recession ended in March 1991, but that was an aberration. Usually the lag time between the beginning of a recovery and the end to increases in the unemployment rate is shorter than four months, says Wachovia Securities' Mr. Vitner. The 5.8% jobless rate also would be a historically low peak. While the recession caused hundreds of thousands of layoffs and untold pain among the unemployed, a peak of 5.8% is nonetheless below the average unemployment rate of 6.8% between 1945 and the beginning of the current recession, says Sung Won Sohn, chief economist at Wells Fargo & Co. "We are still reaping the benefits of productivity coming from technological innovations in the 1990s," says Mr. Sohn. Technological advances have allowed companies to be more productive, that is, to get more output from the same number of employees. This has translated into lower costs and expanded business, which allowed the companies to hire more workers. The result has been that the unemployment rate was pushed to historic lows during the economic expansion of the 1990s and remained at a relatively low level during the economic contraction.