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Updated from 1:09 p.m. EST

Economic recovery looks a little closer after the Labor Department reported Friday that the job market wasn't as bad in December as forecasters had thought.

The economy lost 124,000 jobs in December, compared with a loss of 371,000 in November. The consensus among economists was for a loss of 139,000 jobs, according to


. The unemployment rate rose to 5.8% from 5.6%, in line with expectations.

Notably, the December report showed nowhere near the kind of deterioration seen earlier in the fall. "Businesses pushed very aggressive layoffs in October and November, and frontloaded the bad news," says Banc of America Securities chief economist Mickey Levy.

Those aggressive layoffs were consistent with a broader adjustment process that occurred at the end of 2001. Following Sept. 11, businesses could no longer hope that the economy would skirt recession. Along with letting workers go, they reduced production sharply and offered steep discounts in an effort to cut unnecessary inventory. This clearing of the decks may have been exactly what the economy needed. Wednesday's Purchasing Managers' Report from the Institute for Supply Management (formerly the National Association for Purchasing Management) suggested that manufacturers are on fighting back. Today the Institute said its non-manufacturing business index rose in December to its highest point since December 2000.

"There are clear signs throughout the economy that we're stabilizing," says Levy, who has been more bullish on recovery than some of his counterparts. "A lot of people will be changing their forecasts."

Morgan Stanley chief U.S. economist Richard Berner, who was among the first to suggest that the downturn was more than garden-variety, has already changed his: Yesterday he put out a note saying that the economy is on the cusp of recovery, and he says the dwindling pace of job losses in today's employment report only underscores his belief that the recession's coming to an end.

The big worry is that the job losses we've already seen, along with more in the month's to come, could put a dent in consumption. All told, the U.S. lost 1.1 million jobs in 2001, the most since 1982, the year of a wrenching recession. The unemployment rate is at its highest level in 6 1/2 years.

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But Berner notes that it has proved difficult to discourage the U.S. consumer thus far. Consumer spending looks like it grew at a nearly 4% annualized rate in the fourth quarter, he says, despite the decline in jobs and despite the fear engendered by the Sept. 11 terror attacks.


"The 130 million people that still have jobs got all kinds of incentives and discounts to go out and spend," he says. "They got a big tax cut in the form of lower energy prices, and they may have finally used the tax rebate checks they got in the third quarter. American consumers are out there spending."

Both Levy and Berner think the Fed is finished cutting rates, but this is a point of contention on the Street. It would be out of the ordinary, some say, for the Fed to stop easing rates before seeing more certain signs the economy had touched bottom.

"We're still leaning toward one more cut," says Deutsche Bank chief U.S. economist Cary Leahey. "They don't want to repeat the mistakes of Japan

in the early 1990s and squash a recovery that isn't here yet."

Market action, however, suggests investors believe the Fed won't be cutting anymore, and may, in fact, soon be raising rates. The fed-funds futures market has priced in only a one-in-five chance the Fed will cut by another quarter point from the current 1.75% at its meeting at the end of the month. By midyear, the futures imply a rate of nearly 2.25%.


With the stock and bond markets behaving choppily all day, investor reaction to the jobs report was difficult to gauge. Stocks were generally higher (with brief forays into the red for both the S&P 500 and Nasdaq), but not sharply. The bond market slipped, but not by enough to pull it out of its recent range. There's a sense that many market participants have been banking on a strong recovery all along, and that today's good news isn't enough to get make the optimists cheerier, or prompt them to invest money in stocks that's already invested.

But there may be investors out there, says Fuji Futures strategist Holly Liss, who have not yet bought into the idea recovery yet -- or perhaps they've bought into it, but not into stocks since they look expensive on so many valuation methods. If stocks can break past their December highs, she says, "you're going to get more people believing in this recovery and thinking they may have missed some good buys."