Slow Economy, Slow Job Gains

Job growth will probably rebound from April's meager gain, but not by much. Employment will track the economy's tepid growth rate.

April's ho-hum job figures reflect an economy in low gear as well as attempts by companies to preserve profit margins by limiting new hiring. But the less-than-expected gain of 88,000 jobs -- the lowest monthly tally in about two and a half years -- doesn't mean the economy is heading into a tailspin. In fact, more than half a million jobs were added in the first four months of this year -- not as strong a pace as last year, but by no means indicative of a slump.

Some of the slowdown in Friday's Labor Department report is a bit deceptive. It arises from complex seasonal adjustment estimates each spring relating to the construction sector, which officially shed 11,000 jobs in April. In effect, these adjustments probably made the decline in construction seem worse than it actually was. The employment report also featured a surprising loss of 26,000 jobs in the retail sector, which is likely to pick up again this month as stores start to sell summer merchandise.

There is also good reason to believe that manufacturing, which lost 19,000 jobs last month, could soon post a better performance. March factory orders -- a harbinger of the future pace of business -- posted a solid gain, while a recent survey of purchasing managers in manufacturing showed them to be upbeat about the orders outlook and about future hiring.

That said, don't expect a significant upswing in job creation. Although the economy is likely to steer clear of a recession, the pace of economic growth will remain tepid -- in the 2% to 2.5% range this year. For all of 2007, we expect a total of 1.3 million jobs to be added on a net basis, or an average of about 110,000 a month.

The job report includes some good news on the inflation front: Growth in average hourly earnings slowed a bit, rising a relatively modest 0.2% in April and 3.7% for the past 12 months. At the same time, the unemployment rate rose to 4.5% from 4.4% a month ago.

The Federal Reserve is counting on slower economic growth to loosen up the labor market a bit and hence reduce inflation pressures. This would allow the Fed to avoid raising interest rates and exacerbating the economic slowdown.

We think job trends are on the Fed's preferred path. The unemployment rate is likely to continue to creep higher, reaching about 5% by year end. However, the Fed probably won't feel comfortable about cutting rates until the central bank sees solid evidence that inflation is on a sustainable downward path. So we stick with our outlook for steady rates through this year.
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