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Another Soft Jobs Number

Nat Worden

The U.S. economy's ability to produce jobs continued to disappoint in January, with the Labor Department saying Friday nonfarm payrolls grew by 146,000 last month. The number sparked a bond rally as traders wagered that growth would be restrained in the third full year of economic recovery.

The rise in bond prices was briefly halted when Alan Greenspan was quoted from London saying that the U.S. trade deficit could narrow if the dollar remains weak. It has since resumed.

The Labor Department report was mixed, with the unemployment rate falling to 5.2% in January from 5.4% in December. Economists expected the economy to add 200,000 jobs and for unemployment to hold steady at 5.4%.

"We still can't seem to be able to create a significant number of jobs," said Steven Wood, chief economist with Insight Economics. "If we can't accelerate the number of jobs that we're creating, we're going to have difficulty generating income for workers, and that means that consumer spending is likely to slow and that economic growth this year is probably going to be slower than last year.

"At some point, that means the Fed is going to have to stop raising rates, but probably not before the middle of the year," Wood added.

But Richard Yamarone, chief economist with Argus Research, noted that the Labor Department's so-called household survey firmed in January, indicating strengthening employment in small businesses that don't show up the larger and better-known payroll sample.

"We've accepted the fact that growth is decelerating, and we expect the rest of the year to have 150,000 to 175,000 a month," said Richard Yamarone, chief economist with Argus Research. "We suspect also that activity will be very choppy, but that's why we talk about averages. It's not a surprise, and you've got to remember the economy is creating jobs, just not the payroll type.

"The big secret is the underground economy, which isn't accounted for," Yamarone said. "When the going gets tough, Americans head out and do whatever is necessary to pay the bills."

A statistical milestone was achieved in January, as the total number of nonfarm payroll jobs exceeded its previous peak in February 2001. The economy has now recovered all the jobs it lost in the recession that began in that year.

"This could be a political victory for President Bush," said Patrick Fearon, economist with A.G. Edwards & Sons. "This allows him to argue that he did not, in fact, preside over a net loss of jobs in his term, which has been a persistent criticism."

Bonds rallied on the news soft payroll number, with the 10-year Treasury note going from flat to up 21/32 in price to yield 4.08%. Stocks were posting gains, with the S&P 500 up 4 points, or 0.4%, to 1194.

The manufacturing sector continues to struggle, losing 25,000 jobs in January, in part because of winter shutdowns at automakers. Construction payrolls contracted by 9,000. About 177,000 jobs were added in the services industries, with retail adding 19,000 jobs.

The number of jobs added in December was revised downward to 133,000 from a previously reported 157,000.

On Wednesday, Federal Reserve policymakers said risks to the economy are currently balanced between slow growth and inflation. They announced their sixth consecutive quarter-point boost to the fed funds rate, an action that is expected to be reprised at their next meeting in late March.

Currently, economists expect gross domestic product to expand by about 3.5% in 2005.

In a conference hosted by the British Treasury, Greenspan noted an improved tone in Washington.

"The voice of fiscal restraint, barely audible a year ago, has a least partially regained volume," Greenspan said. "Besides market pressures, which appear poised to stabilize and over the longer run possibly to decrease the U.S. current account deficit and its attendant financing requirements, some forces in the domestic U.S. economy seem about to head in the same direction.

"We may be approaching a point, if we are not already there, at which exporters to the United States, should the dollar decline further, would no longer choose to absorb a further reduction in profit margins," Greenspan said.