The Employment Report Due Friday May Stem Recession Fears

Those still holding out for an imminent recession are reeling from last week's gross domestic product report. They might be sprawling on the canvas Friday when the jobs report is released.

The economy, as it stands, is thus: Many people have jobs, and that's good for spending. But fewer people have jobs than a few months ago, and that's a concern. And it's a growing one as people start worrying if spending cuts will send folks to the unemployment line. It takes a lot to bring down the consumer -- a yearlong stock market slide didn't really do it, but lower job security would. Which means all eyes will be on Friday's employment report.

The markets have been subdued this week, but anticipation over the jobs report is building. If the numbers indicate that staffing levels are steady, that could kill off recession bugs and add renewed confidence to the fledgling market rally.

A meager gain of 5,000 nonfarm jobs is expected, with a bump up in the unemployment rate to 4.4%. Outright job losses would mark the second straight decline in job growth.

But a strong report, even just 25,000 to 50,000 new jobs, would show that the business sector is sucking up decreased profit margins because it fears it will lose employees permanently if it lets them go. It would be a sign that businesses, at least psychologically, are responding to lower interest rates. The expectation then would be that demand will increase -- which could mean the consumer will keep plugging along.

Fat and Happy

It was believed that the swoon in business spending would bring about a massive surge in layoffs, cracking consumer confidence and causing a downward spiral in the entire economy.

But it takes more than that to shake the consumer. Consumers have gotten fat with job security and home equity, and have remained stalwart while businesses have reacted to lousy profits and rising fuel and wage costs.

Lately, consumer confidence has been shaken, however; the most recent survey by the Conference Board showed a growing number of people worried about job security. Yet, the level has not been enough to cause a pronounced decline in spending. Personal consumption grew at 3.1% in the first quarter, and retail sales have been strong in April, according to weekly surveys.

The spending has continued because 95.7% of the population is still employed and because wage growth has been reasonably strong. Layoffs have increased, but on a historical level they have not reached levels consistent with a recession, or even a near recession. (Jobless claims are about at the level where they were in late 1990, but the employed population has increased by 13.2%, so the figure has less meaning.)

Regardless of what the sentiment figures say, people are still plunking down lots of dough to buy houses, which says something about confidence.

And if consumers continue to buy products, companies are going to have to respond. They are trying to deal with falling profits for a few quarters, assuming that reduced demand for materials will cut costs and productivity will remain high.

If that happens, they'll be able to retain their workers, joblessness will rise only slightly and the economy will probably continue to grow at about 2%. One positive effect of a 4.3% unemployment rate is that companies are hiring, so finding a job isn't as hard as when unemployment is around 7%.

"We have not crossed the threshold where wages stop accelerating," said Diane Swonk, deputy chief economist at Bank One. "When the demand for workers outstrips the supply, that's a good place to be when you've lost a job. It's unsettling that there's more churning going on than a few years ago, but how much confidence do you need to buy a home? A lot. That's pretty telling."

A strong report would prove that the obsession with the stock market's troubles doesn't necessarily translate to economic weakness. It would probably propel the consumer to spend at a reasonably solid pace through the second quarter, and the Federal Reserve would be likely to cut rates by just 25 basis points at its May 15 meeting.

Look Out

There is a danger, however. This slowdown differs from others in that it is being led by the business sector. And with that comes the knowledge that businesses will have to reduce costs if they don't see an adequate pickup in profit margins.

Like it or not, capital controls the labor in the country, and people, continuing to spend money, could be caught unaware when job losses intensify if businesses no longer find it prudent to maintain their current workers.

A steady but not spectacular rate of consumer spending could affect corporate profitability for several more quarters. Reduced profits are a prominent reason for the fit the Federal Reserve has been throwing in the last few weeks; it believes business investment needs to recover for the economy to get back on track.

"If businesses stop laying off people and start spending again, things will be OK," said Bill Quan, economist at Aubrey G. Lanston. "Businesses could drive the consumer into a downturn."

The resulting effect could be particularly harsh, simply because the level of consumer debt is at its highest since 1986. Regardless of the historical levels of layoffs -- and the record job creation and the relatively low unemployment rate -- those trends are all going in the wrong direction.

If they reverse course, the recession-mongers might jump off.