By Martin Wolk
msnbc.com
updated 1/23/2004 4:30:42 PM ET 2004-01-23T21:30:42

Rising employment is no longer the missing piece of the economic picture, but the labor market still trails far behind other growth indicators, and the situation is unlikely to change Friday when an important government report is released.

Major Market Indices

In a monthly report closely watched by financial market participants, the Labor Department is expected to report that the economy added about 127,000 jobs last month and that unemployment rate remained steady at 5.9 percent, according to economists surveyed by Thomson Global Markets.

Those are respectable numbers — enough to support the case for a continued strong expansion — but fall well short of the eye-popping “blowout” report some bullish economists believe is likely soon.

On average the economy needs to add 150,000 jobs a month just to keep up with the growing size of the nation’s work force, economists say — a level that hasn’t been seen since January 2003. Still, employer payrolls have expanded for four straight months, ending the long “jobless recovery” that had provided powerful fuel for President Bush’s political rivals.

“I think we have to get 150,000 (jobs) per month on a consistent basis to be fully confident that the economic expansion is self-sustaining and self-reinforcing,” said Mark Zandi, chief economist of Economy.com, a forecasting firm. “All signs are we’re heading there, and we may get that number tomorrow.”

But because of structural changes in the nation’s manufacturing sector, he said he was skeptical that the economy would return anytime soon to monthly gains of 250,000 to 300,000 jobs that were typical in the late 1990s.

“I am skeptical of that,” he said. “I don’t see manufacturing participating in any significant way. … The economy is coming back, but I can’t see how it comes roaring back without a fully participating manufacturing base. “

Weekly claims a positive sign
Other analysts disagree strongly and say the odds are rising for a “blowout” report that would show a monthly gain of about 300,000 new jobs, which would be the highest in nearly four years and likely would send market interest rates sharply higher.

“I’m very sympathetic to that view,” said Ken Mayland of ClearView Economics. He pointed out that new claims for unemployment benefits, reported Thursday , have fallen to an average of 350,000 in recent weeks, the lowest level in three years.

When weekly new claims fell to that level in 1992, early in the last expansion, “Labor markets heated up in a major way — they caught fire,” he said.  “Within a few short months you went from some piddling and disappointing job gain figures up to increases of 200,000 and 300,000 a month.”

He and other analysts said recent increases in manufacturing indicators, including factory overtime, suggest the hard-hit factory sector is on the verge of reporting its first increase in employment in more than three years.

Other analysts disagree and say weakness in manufacturing employment will put a damper on long-term growth even as rising productivity continues to boost output and profits.

“One of the great ironies of the new economy is that through productivity you can achieve output gains without adding new workers,” said John Silvia, chief economist at Wachovia Securities.

Even with the overall economy growing at a stunning 8 percent rate in the third quarter and at least 4 percent since then, job gains have fallen far short of what would be expected, especially more than two years into an expansion cycle.

Silvia also said the growing economy is likely to draw in new job seekers, leaving the unemployment rate “sticky” near the 6 percent level.

The weak labor market means that workers saw almost no real wage growth last year after getting only a tiny boost in 2002. That means inflation is likely to remain at or below the Federal Reserve’s target level, allowing the central bank to keep short-term interest rates at their current low levels, possibly into 2005, said Ethan Harris, chief U.S. economist for Lehman Bros.

It all adds up to a “great” earnings picture, which is one of the reasons the broad stock market is already up 2 percent in the new year and 7 percent over the past 6 weeks.

“Workers have very little bargaining power, but firms are seeing markets pick up for their products,” Harris said. “On top of that you have some abatement in risk-averseness — investors are getting over some of the trauma of the stock market drop. And you have a very low interest rate environment.”

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