Jobs Data Show Hard Work Ahead for Economy

Updated from 2:10 p.m. EST

A surprising increase in weekly unemployment claims might not have pointed to a real softening in the labor market, but some economists believe that Friday's employment report will.

First-time unemployment claims unexpectedly rose 64,000 to 460,000 in the week ended March 23, according to the Labor Department. That was the highest level since the week of Dec. 1 and well above economists' estimate of 380,000.

Still, the increase was due in part to reapplications for extended benefits, according to government sources. President Bush recently signed legislation that allows workers to receive funds for another 13 weeks after their current benefits have expired.

"The rise in initial claims will have no bearing on the unemployment report but the market is having second thoughts about how strong the rebound in employment is going to be," said Cary Leahey, chief economist at Deutsche Bank.

Trending Up

While claims numbers are volatile, the four-week moving average, which smoothes out weekly fluctuations, rose to its highest level since mid-January. In addition, continuing claims rose to 3.61 million from 3.51 million in the prior week, which gave some economists pause.

The employment report for March, which will be released Friday morning, is expected to show that payrolls increased, albeit at a slower pace than the prior month, while the unemployment rate probably inched up one-tenth of a percentage point to 5.6%. Economists generally expect 50,000 payroll additions in March, down from 66,000 in the previous month.

Last month, the unemployment rate unexpectedly fell to 5.5% as the economy added 66,000 jobs. Economists had expected no change in payrolls and the jobless rate to rise to 5.8%.

Still, some believe that those numbers were skewed by seasonal factors such as unusually warm weather, which gave a boost to construction in February. In addition, fewer hirings in the retail industry over the Christmas season meant fewer firings in subsequent months.

David Gitlitz, chief economist at Trend Macrolytics, said these seasonal factors will provide no such boost to the March numbers and he is looking for the unemployment rate to spike up, although he offered no specific target.

"We'll probably see a fairly significant softening in the labor market," he said, adding that he expects the jobless rate to rise to 6% before it stabilizes.

Nothing Shocking

Peter Kretzmer, senior economist at Banc of America, agrees that the strength in the labor market was probably overstated last month. He's looking for the unemployment rate to rise to 5.6%, with no change in payrolls.

"The rapid declines in unemployment after Sept. 11 have long since past but we're seeing fairly modest job growth," he noted.

While health care and legal services probably saw growth in March, weakness in retail trade may have offset that, he said, adding that retailers probably laid off about 30,000 to 40,000 workers on a seasonally adjusted basis.

"Expectations for retail trade hiring in March were quite strong as a result of the Easter holiday but at this stage of the recovery, retailers have been quite conservative and so hiring may disappoint," he said, adding that it will also take time for manufacturers to start hiring again.

Still, other economists are more optimistic. Leahey, who expects 150,000 jobs to be added in March and a jobless rate of 5.5%, said the strength in consumer spending last quarter points to a labor market that has not seen a sharp deterioration. He also noted that while some seasonal factors may have given the February numbers a modest boost, they were impressive nonetheless. Although the weather was warmer-than-usual in February, it has also been mild in March, which may have helped the construction industry, he added.

Brian Jones, an economist at Salomon Smith Barney is equally upbeat, and is looking for the unemployment rate to remain steady at 5.5%. He also believes 125,000 jobs were added to the payroll in March.

"You're getting smaller factory layoffs and increases in retail trade and narrowly defined services," he said.

Jones is looking for 25,000 manufacturing jobs to be shed compared to 50,000 last month but given the strong manufacturing report on Monday, he said that number could be flat. The Institute for Supply Management rose to 55.6% in March from 54.7% in February.

Jones said temporary help agencies were among those hiring last month. Temporary employees are usually the first to be let go in a recession and the first to be rehired during recovery. He is also expecting 40,000 retail jobs to be added. Retailers added 58,000 jobs in February.

"When you look at the percentage of consumers saying jobs are hard to get, the help-wanted numbers and the fact that the economy expanded by between 5% and 6% last month, these are sign that things are improving," he said.

Stewart Hoffman, chief economist at PNC Bank, is cautiously optimistic about the labor market going forward, saying the unemployment rate should remain in a range of 5.5% to 5.75% over the next few months. However he is concerned about escalating violence in the Middle East and its impact on oil prices. "If crude oil continues to spiral upward, this could have an impact" on the labor force, he said.

Hoffman is looking for 75,000 to 100,000 new jobs to be added to the payroll Friday and believes average hourly earnings should inch up to 0.3%. The consensus also calls for earnings to rise two tenths of one percent from last month's 0.1% reading, which would bring the year-over-year increase down to a 15-month low of 3.6%.