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msnbc.com

Despite a string of encouraging data in recent days, economists are expecting another grim employment report Friday when the government offers its first indication of how the economy performed in May. Yet even if the Labor Department reports a fourth straight month of job losses as expected, economists are sharply divided on whether the Federal Reserve’s policy-makers will find it necessary to lower rates again when they meet in three weeks.

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The monthly employment report will be closely watched by financial markets as investors look for signs that the economy at last is emerging from its long slump. For the many analysts who believe the economy’s latest slide, beginning last fall, was due largely to uncertainty over the war in Iraq, data to be reported in coming weeks will be critical because May was the first full month after the war’s shooting phase came to a conclusion.

But even if the economy improved in May it certainly will not turn quickly, analysts say, and employers will be slow to hire until they see convincing evidence of stronger growth, meaning at least several more months of below-par employment reports, analysts say.

“We are seeing the economy stabilize,” said Gerald Cohen, senior economist at Merrill Lynch & Co. “The question is, what is the strength of the bounceback, and that is still to be determined. In the near term I wouldn’t expect much job growth.”

On average analysts estimate the economy lost 39,000 jobs last month after losing 529,000 jobs in the previous three months. Figures from earlier months will be adjusted in a major multiyear revision that also will be unveiled Friday, making the report a bit harder than usual to interpret. Economists also expect the unemployment rate to creep up to 6.1 percent, its highest level in nearly nine years, from 6 percent in April.

“Real labor market improvement is at least a couple months away,” said Tim O’Neill, chief economist for Bank of Montreal. And he said it will likely take until the end of the year before the economy is adding at least 150,000 jobs a month, which is considered the minimum needed to keep up with the natural growth of the work force.

In recent days and weeks there have been encouraging signs that the worst of the latest slump may be over. The Institute for Supply Management reported that the manufacturing sector barely contracted in May as it reported its closely watched survey turned in its best performance in three months. And companies announced plans to eliminate only 68,000 jobs last month, the lowest total in more than two years, according to Challenger, Gray & Christmas, an outplacement firm.

But Thursday’s report that new claims for unemployment benefits rose to their highest level in five weeks reinforced the notion that even if the economy is recovering, the labor market is trailing far behind.

“The revenge of the new economy miracle has been that the modest growth of the past two years has been achieved entirely through productivity gains (top graph) without adding workers,” Wachovia Securities chief economist John Silvia said in a note. “This suggests the jobless recovery is not simply a cyclical phenomenon but may be more structural than some policy-makers would like to admit.”

Economists generally are optimistic that the economy will rebound strongly in the second half of this year and through 2004, with many arguing that the main obstacle to stronger growth over the past nine months has been “Iraqophobia,” said Richard DeKaser, chief economist for National City, a Cleveland-based bank.

“When you combine the waning war-related uncertainty and throw in a little fiscal release,” he said, “we’ve not only stanched the weakness but set ourselves up for above-trend growth for a sustained period of time.”

Fed Chairman Alan Greenspan appears to agree. In comments to an international group of central bankers meeting in Berlin this week, he said that early data from May indicate the economy has “stabilized” and that there are indications of a “fairly marked turnaround.”

But Greenspan characteristically added enough caveats and qualifiers that he left financial market analysts scratching their heads about the Fed’s next move.

In addition to the employment report Friday, economists say upcoming data on May inflation and retail sales will factor strongly into the Fed’s rate decision.

“The market is pricing in a cut, but I remain unconvinced the data will be sufficiently weak that they will want to make a move,” said O’Neill.

Cohen said Greenspan and his colleagues probably have not made a decision.

“A rate cut is not a fait accompli,” he said. “It is so dependent on the data.”

If the Fed fails to cut rates this month, the central bank may be on hold for quite a while, because “even the pessimists are saying there will be a pickup in growth,” Cohen said.

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