Labor Rebound Still Sluggish

Payrolls bounce back in January, but not as much as expected.
By Rebecca Byrne ,

While a string of labor statistics had pointed to a big improvement in the job market last month, the employment report once again proved disappointing. Economists still found reasons to be optimistic.

Nonfarm payrolls rose by 112,000 in January, well below expectations for gains of 165,000, as businesses remained cautious in hiring new workers. Still, payroll growth was the strongest since December 2000 and the unemployment rate fell to its lowest level since January 2002, hitting 5.6% from 5.7% in the prior month.

"It's a tortuously slow process, but I think it is becoming more clear that the labor market is improving," said Doug Porter, senior economist at BMO Nesbitt Burns.

One worrying aspect of the jobs report Friday was a decline in temporary help, a sector whose strength is usually considered a sign of future full-time employment. Temporary workers fell 21,000 after rising for eight straight months. Still, another leading indicator, the average work week, rose by 0.2 hours to 33.7, and total hours worked increased by 0.8%.

"Overall, the data show mild and gradual improvement in labor markets, with wage growth modest, and labor market slack significant, but very gradually diminishing," said Steven Wieting, senior economist at Smith Barney. "Employment gains appear well short of those necessary for Fed policy concerns to grow."

Indeed, stocks and bonds rallied Friday, as investors determined that the

Federal Reserve

is unlikely to raise interest rates any time soon. A sluggish job market also makes for better profits because it suggests businesses are keeping their costs low.

Lynn Reaser, chief economist at Banc of America Capital Management, said while she was disappointed in the jobs report, she does believe the labor market is "turning the corner," noting that productivity growth has already started to moderate.

Strong productivity has been one factor behind the weak labor market recently, along with continued outsourcing overseas. "We should see job growth moving back to the 150,000 to 200,000 range relatively soon," she said. "We still believe that we will see job growth averaging 175,000 over the year."

Donald Straszheim, president of Straszheim Global Advisors, is expecting more modest employment gains this year, in the range of 100,000 to 150,000 per month. "While the U.S. economy is improving, technology, globalization and the natural drive of firms to maximize their profits is draining some of the job growth that would have occurred here in America to overseas markets," he said.

Economists had expected very strong job gains last month, in part because unemployment claims had remained below 400,000 for 18 straight weeks and layoffs had shriveled from last year. In recent months, however, the payroll data has painted a different picture of the job market than other labor market indicators.

Some economists say the establishment survey, which determines the level of payrolls, has been understating new business formation. But Kathleen Utgoff, commissioner of the Bureau of Labor Statistics, defended the survey Friday, saying it tracks jobs derived from the unemployment insurance system "closely."

Most economists believe the payroll data are more reliable than the unemployment statistics because the government surveys a much wider sample of the population in compiling that number.

The manufacturing sector once again showed the most weakness last month, losing another 11,000 jobs. But the workweek in manufacturing increased to 40.9 hours, the highest this year. Meanwhile, the retail sector added 76,000 jobs and the construction industry added 24,000. Both industries typically lay off workers in January.

"About two-thirds of the job creation occurred in retail employment. But that gain scarcely reversed a 67,000-drop over the two prior months," said UBS economist Maury Harris. "The implication is that much of the pickup in hiring reported today occurred only because seasonal hiring was lower than usual in 2003."

Still, Harris said he believes payroll growth will improve this year.

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