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Calm Counsel for Employment Handicappers

Some analysts still see a good chance payrolls will come in light Friday.

Friday's employment report could well be that rare piece of economic data that cements perceptions of interest rate policy. Even in the context of Thursday's strong report on jobless claims, however, forecasting the number has never been harder.

Policy officials are believed to focus on two conditions for raising interest rates: continued strength in the labor market and a pickup in inflation. If the employment report comes in much stronger than expected Friday, the odds for a June rate hike will likely go up and any holdout doves will quickly turn to hawks. If the data are particularly disappointing, however, investors could begin to question whether the


will raise rates at all this summer.

Nonfarm payrolls are expected to rise by 165,000 in April after 308,000 jobs were added in March. The unemployment rate is expected to hold steady at 5.7% and average hourly earnings are seen rising 0.2%.

Still, estimates vary widely among economists. Richard Yamarone, an economist at Argus Research who had accurately predicted job gains until the last report for March, estimates that just 95,000 jobs were added in the month of April.

Yamarone notes that during the survey week, most of the nation was plagued by "torrential rainstorms and inclement weather," which idled outdoor workers like those employed in construction. In addition, the large number of layoffs announced in January -- 117,566 -- probably resulted in jobs being shed in April, since there is typically a three- to six-month delay for layoff announcements to be realized, he said.

Layoff announcements in April were also higher than announcements of new hiring, according to Yamarone, who poured over transcripts from 165 conference calls.

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have all announced they will cut 3,000 positions or more. Outplacement firm Challenger, Gray & Christmas said layoffs rose 6.1% in April after hitting a 10-month low in March.

"It is likely that some of the eye-popping 308,000 job gain in March borrowed a bit from April hiring activity," Yamarone said. "For that we should expect some return to 'normalcy,' or a less ebullient level."

After the March employment report, stocks rallied while bonds swooned as the prospects for a summer rate hike shot up.

In the more bullish camp lies J.P. Morgan economist Bill Sharp. While he agrees there could be some "payback" from March's big weather-induced gain, he is still calling for 250,000 job gains in April, in part because there has been a five-week interval between the April and March surveys.

"April seasonally adjusted payrolls have risen 0.25% (or 287,000) on average, in years containing five-week intervals compared to 0.05% (or 56,000) for those containing four-week intervals," he said.

Sharp also noted that the Conference Board's "jobs-plentiful" index rose 1.1 point to 15.8 in April, while the "jobs-hard-to-get" index -- which is highly correlated with the unemployment rate -- fell 2.3 points to 27.6, its lowest reading since November 2002.

Historically, a 1-point move in the "jobs-plentiful" index has resulted in 270,000 monthly job gains, while a 2-point drop in the "jobs-hard-to-get" index has led to job gains of 310,000, Sharp said.

BMO Nesbitt Burns economist Russell Sheldon is also optimistic about the upcoming report, calling for 200,000 job gains.

In recent weeks, a slew of data has pointed to strength in the job market, he said. Initial claims for state unemployment benefits fell by 25,000 to 315,000 in the week ended May 1, the lowest level since the week ended Oct. 28, 2000. Meanwhile, the four-week moving average declined 3,750 to 343,250.

A component of the Institute for Supply Management's manufacturing index also suggests the job market is improving.

The ISM employment index rose to 57.8 in April from 57 in March, the highest level since December 1987. Meanwhile, the employment index in the ISM services report rose to 54.5 in April from 53.9 in the prior month.

A survey from staffing firm Manpower back in March showed that 28% of employers expect to add workers from April to June and the National Association of Business Economics said last month that employment is rising "at an increasing rate."

"What we're looking at here are independent surveys of companies that all come to the same conclusion, which is there's been a night-and-day turnaround from a cost-cutting perspective to a rehiring perspective," Sheldon said.

A pickup in hiring is very important if the economy is to continue growing at a strong pace. Gross domestic product rose 4.2% in the first quarter after a 4.1% increase in the final three months of 2003.

Without a sustained improvement in the labor market, economists say consumer spending could be in jeopardy, particularly since oil prices are nearing $40 a barrel and tax rebates aren't likely to offer support going forward. Consumer spending accounts for two-thirds of economic growth in the U.S.

Over the past two years, millions of jobs have been lost through a combination of cost-cutting, stronger productivity and outsourcing. Some of those jobs have been lost forever and Fed Chairman Alan Greenspan has said it will take time for worker insecurity to ebb.

Still, the Fed said in its policy statement Tuesday that hiring "appears to have picked up," prompting investors to raise their expectations for a June rate hike to just under 50%. A strong labor report Friday could increase the chances for a rate hike at the next meeting, although some economists say it would be unusual for the Fed to raise rates without moving to a tightening bias first.

The Fed adopted a neutral bias on inflation Tuesday and said the "upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal." After a batch of strong economic data recently, some investors had thought the Fed would say the risks are tilted toward conditions that may generate higher inflation.

BMO's Sheldon said the Fed is waiting for stronger employment and higher inflation numbers before tightening its bias because it wants a small rate hike to be perceived as necessary rather than threatening. "I think they're waiting for economic news that is so strong that the beginning of a tightening cycle won't have any negative implications," he said.