Job-growth numbers allay fears of recession

Times Staff Writers

washington -- Recession fears receded Friday after the government said job growth in August and September was better than economists had expected. But the sunny employment report could also dim prospects for more interest rate cuts this year.

Payrolls expanded by 110,000 jobs last month, the Labor Department said, slightly more than estimated. The unemployment rate edged up to 4.7%, from 4.6% in August.

Wall Street cheered the news, with the blue-chip Standard & Poor’s 500 index closing at a record high. What buoyed markets the most was a revision of August’s preliminary job-creation numbers, turning what had been a loss of 4,000 jobs into a gain of 89,000.


The consensus that emerged Friday was mostly positive: Although the economy is not creating jobs quite as fast as the population is expanding, it is not contracting into a recession.

“The jobs report suggests that the economy will continue to move forward, albeit at a slower pace,” said Sara Johnson, an economist with Global Insight, an economic forecasting firm based in Waltham, Mass. “This means that the economy is heading to a soft landing instead of a hard landing despite the housing market turmoil.”

August’s unemployment report -- which had appeared to reflect the first time in four years that the economy lost jobs -- spooked the markets, triggering a 250-point plunge in the Dow Jones industrial average. It also loomed large in the Federal Reserve’s Sept. 18 decision to cut its benchmark interest rate by a larger-than-expected half of a percentage point, to 4.75%.

On Friday, the government said the reversal was largely attributable to an adjustment in the number of education jobs because August surveys had underestimated the number of teachers employed by local school districts.

The new report puts a question mark over Fed Chairman Ben S. Bernanke’s next move. Many observers had predicted that the Fed would continue to ratchet down its benchmark interest rate late this month and in December to prevent the housing slump and the credit crunch from derailing the rest of the economy.

“I think there’s a pretty good chance that the Fed is done cutting interest rates,” said Bill Buechler, president of Barclay Partners Asset Management, a hedge fund firm based in La Jolla. “They did what they needed to do to mediate the panic.”


Bond traders were certainly betting that way Friday. The yield on the 10-year U.S. Treasury note, to which many home loan rates are pegged, rose to 4.64% from 4.51% on Thursday.

“Clearly, that’s not positive on the mortgage side,” said Mario DeRose, a bond market strategist at Edward Jones in St. Louis.

Johnson of Global Insight, however, predicted that the Fed would proceed with plans to loosen the reins on credit.

“We think the economy is fragile enough that the Federal Reserve will need to cut rates further,” she said.

As for the Federal Reserve itself, a senior official indicated Friday that the central bank would take a “nimble” approach to interest rates to steer the economy through the current credit troubles.

“Once we get through the near-term weakness caused by the extra downleg from the housing contraction and any spillover from tighter credit conditions, I am looking for moderate growth with high levels of employment,” Fed Vice Chairman Donald L. Kohn said in a speech to the Greater Philadelphia Chamber of Commerce. “We will need to be nimble in adjusting policy to promote growth and price stability.”


At the White House, President Bush met with his economic advisors and hailed the report as “good news.”

“It’s an indicator that this economy is a vibrant and strong economy,” Bush told reporters afterward in the Oval Office. The revision in August’s numbers “means that we’ve had 49 consecutive months of job creation, and that’s the longest uninterrupted job growth on record for our country.”

But administration critics were less sanguine, pointing to longer-term trends that are more worrisome.

For instance, they noted that much of the improvement in the August job-creation number seemed to come from the better count of the number of teachers employed.

Democrats noted that private-sector employment was not as robust, and that the construction and manufacturing sectors showed significant losses.

Critics also focused on the Labor Department’s revision downward of job-creation data from the 12 months ended in March. The department reported that the economy created 297,000 jobs fewer than initially reported, and most of that reduction -- 217,000 -- was in the private sector.


“This administration continues to sugarcoat bland economic data like today’s,” said Sen. Charles E. Schumer (D-N.Y.), chairman of Congress’ Joint Economic Committee. “We need the administration to spend more time putting the conditions in place for good-paying job creation and shoring up our battered housing market, and less time hyping lackluster news and downplaying real threats to our economy.”

Economists say that they expect the unemployment rate to continue to rise in coming months, but that it is unlikely to be a drag on the economy. One reason is that real wages are also on the rise, and they predict that consumer spending will stay strong.

“What you see is a labor market that is a little on the soft side . . . and it may continue to be soft or a little softer,” said Harry Holzer, former chief economist at the Labor Department and now a professor of public policy at Georgetown University. “Right now it probably doesn’t suggest recession, but probably something short of full steam ahead.”

Investors on Wall Street, however, appeared elated at the prospect that the economy would stay out of recession.

The S&P; 500 rose 1%, to 1,557.59, surpassing its previous peak of 1,553.08 on July 19. The Dow Jones industrial average closed up 0.7% to 14,066.01, just off its peak of 14,087.55 set Monday.

“Today you have euphoria going,” said Robert Bissell, president of Wells Capital Management in Los Angeles.


The unemployment report appeared to bolster other recent signs that the upheaval in the financial markets over the summer was steadily dissipating.

Wall Street giant Merrill Lynch & Co. disclosed Friday that it was writing off $5 billion in losses caused by troubled sub-prime mortgage and private equity loans. But its stock rose 2.5% as it joined a chorus of investment banks that have said the worst of their credit market problems appeared to be over.


Reynolds reported from Washington, Hamilton from New York.