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Job Growth Won't Stop Cut

The market perked up on a sunny employment report, but slow growth should still spur the Fed to action.

Recession calls may be folding, but rate cuts remain in the game.

Wednesday's economic data threw into question some market participants' gripping fear that the U.S. economy is headed for a recession. But it didn't throw traders off the trail of a fed funds rate cut come Dec. 11, when the

Federal Open Market Committee


The combination helped edge stocks higher, despite more angst in the credit markets, including a ratings agency warning that bond insurer



may be more likely to face a

capital shortfall.

A collection of employment data and reports on productivity, factory orders and the general states of the service and manufacturing segments of the economy for November conspired Wednesday to buoy optimism that the economic slowdown under way may slide through without sparking a full-blown recession.

The key piece of data was the ADP National Employment report, which revealed that the private sector added 189,000 new jobs to the economy in November. The

Dow Jones Industrial Average

responded by finishing more than 196 points higher to 13,444.96.

The report surprised the market, which had set expectations at about 50,000 new jobs added. It is also causing some economists to rethink their expectations for Friday's nonfarm payrolls report. The consensus expectation of analysts is that the Bureau of Labor Statistics will report just 70,000 new jobs added in November, including private sector and government jobs.

The weak estimates are not out of the blue. They follow recent data that have suggested unemployment may rise amid the fourth quarter's slowing economy. Unemployment claims are up, and reports on the job market in consumer confidence surveys have careened to the negative.

But it may not be the labor market, or at least November's labor market, that marks a line in the sand for the economy, says Joel Prakken, chairman of Macroeconomic Advisors, which oversees the ADP National Employment Report.

"Employment is a lagging indicator of economic growth," he says, noting that

the 189,000 jobs simply reflect the economy's strength in the second and third quarters of the year. GDP growth in the second quarter of 2007 was 3.8%, and third-quarter growth is currently estimated at 4.9%, despite the onset of the credit crunch that's seized up debt markets and crushed earnings at banks and lenders like




Washington Mutual



Countrywide Financial



Merrill Lynch


, among others.

The first quarter of 2007 grew at a rate of just 0.6%, which Prakken might argue presaged weak nonfarm payrolls additions under 100,000 in the months of July, August and September. Prakken believes the lag between growth and labor market data can be as long as six months, noting he might expect some weaker growth in 2008 to reflect the current slowdown.

Prakken notes that he has not altered his estimate for 0% growth in the fourth quarter, adding that he actually edged it down 0.1% recently to reflect weaker inventory growth among U.S. businesses.

"It you're worried about recession, what this does tell you is that there is plenty of momentum for employment growth to suggest we could have a couple of quarters of weak growth without tipping the apple cart," says Prakken.

Instead, he points to some possible signs of bottoming in the labor declines in manufacturing and construction sectors of the economy. Possibly on the back of ever-increasing export business tied to the weak U.S. dollar, Prakken's report shows that the manufacturing industry may be nearing its job-loss nadir. The industry lost 5,000 jobs in November, which is its 15th consecutive drop, but it is the smallest decline in that period, he says.

Likewise, the construction business lost 6,000 jobs in November, the sector's 12th sequential decline, according to the survey. But that marks the smallest drop since January. He also notes that temporary retail hiring, which many expected to decline sharply amid a consumer spending slowdown that could hit holiday sales, was surprisingly good.

The weaknesses driving down GDP for the current quarter and the first quarter of 2008 are still mostly housing-market driven, says Prakken.

"Housing's deep recession is not enough on its own to throw the economy into recession," says John Lonski, Moody's Investors Service's chief economist. It shows that employment is yet to stall, and Lonski notes also that holiday sales and auto sales have not been worse than expected recently. "You need to see a drop in capital spending and consumer spending to put the economy over the edge."

Recent reports on economic activity in the service and manufacturing sectors are lower, but still in growth mode. And a higher-than-expected report on productivity reveals no wage inflation scares on the horizon. Lastly, CEO surveys reveal optimism about their future business. So, indicators of both consumer and business spending recessions are yet to unveil themselves.

For the Federal Reserve, the data mean that while stronger-than-expected employment speaks mostly to the past, it overlays with economic indicators that have not fallen apart. That suggests the Fed may not be drowning. For Lonski and Prakken, it may mean the Fed is in for just 25 basis points of cutting instead of a more drastic 50 come Tuesday.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click


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