Employment Report: How Bad Is Bad?

Another doozy of an employment report could be waiting to smack the market in the face Friday morning.

Despite a few glimmers of hope that have emerged from recent economic data, the employment figures are expected to be ugly. Economists anticipate that nonfarm payrolls declined by 44,000 and the unemployment rate rose to 4.6% in June. If that's the case, this will be the highest rate of joblessness since March 1998.

Labor trends tend to lag behind other parts of the economy, so some economists are hopeful the June report could be the last of the truly terrible tales. Going forward, the unemployment rate is expected to rise, but some economists believe the pace of job losses will slow.

"There are some signs that things are close to bottoming and that this might be the worst payroll report that we get. Nonetheless, I would expect a continued rising unemployment rate, but a steadily rising rate, rather than one that's been rising very rapidly," says Chris Wiegand, economist at Salomon Smith Barney.

The unemployment rate was 4.4% in May. It has moved generally higher since October 2000, when it stood at 3.9%.

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There isn't much for economists to point to as far as positives go, but some expect the Federal Reserve's efforts in lowering interest rates will start to have a positive impact on companies and the general economy. The National Association of Purchasing Management's latest purchasing managers' index, for example, showed the pace of job losses in the manufacturing sector slowed in June from May.

These bits of evidence don't mean much for the June jobs release, however. Between the second week of May and the second week of June, when the Labor Department conducts its employment survey, the number of people receiving insured unemployment rose by 220,000, which Wiegand calls dramatic. Initial claims for unemployment were also up dramatically in the same period, rising by 20,000.

Taken together, these reports represent further deterioration in the labor market. Economists at Salomon have a bleaker outlook than the consensus among other economists; they expect the report will show June payrolls fell 175,000 and the unemployment rate rose to 4.7%.

A report that weak would likely give rise to a new round of calls from investors asking the Federal Reserve to administer more drugs and again cut the short-term interest rate . After the Fed's six rate cuts since the year began, the federal funds rate now stands at 3.75%. Investors are pegging their hopes on the fact that the cuts should soon be evident in the economy, encouraging consumers to keep up their spending and pushing corporations to revive business outlays.

There's evidence the Fed is just about finished with its rate-cutting schedule. And Bill Quan, economist at Aubrey G. Lanston, says that's an indication the monetary policy body won't react strongly to the latest jobs report, no matter how weak it is.