By John W. Schoen Senior producer
msnbc.com
updated 10/5/2007 3:15:33 PM ET 2007-10-05T19:15:33
ANALYSIS

The government’s report on job growth for September may help ease fears that the economy is on the verge of a credit crunch-driven recession. But the bounce-back from last month's initially bleak report could cast some doubt on widely held expectations that the Federal Reserve will continue cutting interest rates when it meets at the end of this month.

Major Market Indices

The report from the Labor Department Friday showed that employers added some 110,000 new jobs to the U.S. economy last month, the biggest one-month gain since last May. The report also revised figures showing a surprise loss of 4,000 jobs in August, now saying the economy actually added 89,000 new jobs.

The weak August report had prompted some forecasters to see rising odds that the United States would slip into recession. The September report seemed to confirm that the economy has slowed since posting a 3.8 percent gain in the second quarter but may have enough momentum to avoid slipping into reverse. That outlook was confirmed Wednesday in a separate report from payroll processor ADP.

“I think it's safe to say now that there is a deceleration of employment under way that with a predictable lag one should have expected given the slowdown in economic growth that's occurred over the last year and a half,” said Joel Prakken, chairman of Macroeconomic Advisers, which analyzes and publishes the report with ADP.

Video: Bush on economy The slowdown has hit some industries harder than others. Construction firms cut 14,000 jobs in September. Manufacturing industries continued a decade-long trend, shedding 18,000 jobs. Retailers cut 5,000 jobs. And after six years of steady growth, the financial services industry that helped fuel the housing boom; that sector cut 14,000 in September.

Those losses were more than offset by job creation in education and health services, professional services, leisure and hospitality and in government work.

Job growth in September also followed the continuation of a long-standing trend of strong hiring by small and medium-size businesses — even as larger companies continue to shed jobs. Large businesses (which the ADP survey defines as those with 500 employees or more) cut 26,000 jobs in September. But those losses were more than offset by small and medium size-business — which posted a net gain of 64,000 new positions.

And worries seem to have eased that the credit crunch that swept through the financial markets in August might make it tougher for small business to borrow. A survey by PNC Financial Services Group found that 90 percent of small and midsize business owners who need credit say it is no harder to get than three months ago. The survey also found that plans for capital spending have increased from PNC’s last two surveys, especially spending on new technology.

While major banks and investment firms recently reported heavy financial damage from the meltdown in the credit markets last month, the storm clouds are apparently breaking up. That’s based largely on Wall Street’s belief that Fed Chairman Ben Bernanke and his central banking colleagues are ready to administer more medicine in the form of further rate cuts. Friday’s report could lower the odds of further cuts at the next regular meeting Oct. 30-31.

Some market watchers say the Fed’s aggressive treatment in August may have been just the right cure for a seizure of the credit markets that threatened to become a wider lending slowdown.

“I think you do have to give some credit to the Fed,” said Lakshman Achuthan, managing director of the Economic Cycle Research Institute. “They really set everybody up. They had the markets thinking about (a quarter-point cut) and they shocked us with a (half-point). And that was almost like the defibrillator, getting us out of the paralysis and getting resilience back in the market.”

By cutting rates, the Fed has helped ease fears that the ongoing housing recession will spill over into the broader economy. And so far, that strategy of flooding the financial system with money seems to be working

“So far the credit market has been behaving, responding reasonably well to the Fed cuts,” said  Dr. Sung Won Sohn, CEO of Hanmi Financial. "That's one of the reasons why I am saying that the economy will not fall off the chair. In fact, it will grow in probably 1.5 to 2 percent range.”

But dodging recession by cutting rates presents another problem for the Fed. With the dollar hitting new lows, falling interest rates make U.S. securities even less attractive to foreign investors — which could push the U.S. currency even lower. And a weaker dollar will eventually raise the prices of many of the foreign imports that make up a growing part of the American shopping basket.

“The global economy looks pretty strong; I think there are a lot of inflationary pressures,” said Julia Coronado, an economist at Barclays Capital. “I think in the near term that's not going to affect the Fed's policy decisions because they are more focused on the near-term risk to the economy. But over the longer term, we do expect them to come back in and have to tighten policy, to take some of that back.”

The Associated Press contributed to this story.

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