Video: Snow on jobs

By Martin Wolk Executive business editor
updated 3/5/2004 5:43:45 PM ET 2004-03-05T22:43:45

Employers added only 21,000 jobs last month, the government said Friday in another disappointing employment report that handed Democrats fresh ammunition to attack President Bush’s handling of the economy.

The figure shocked forecasters, who had expected a net increase of 128,000 jobs on average, and raised concerns that the current 2-year-old economic expansion could slow late this year or in 2005. Bond prices soared on the news, sending long-term interest rates to their lowest levels since July as analysts gave up on the idea that Federal Reserve will raise interest rates in the next several months from their current historically low levels.

Although the unemployment rate remained unchanged at 5.6 percent, that was only because 392,000 people left the labor force. The labor force participation rate, which generally rises in good economic times, fell to 65.9 percent of the nation’s adult population, the lowest since 1988.

“This is a terrible number,” said Sung Won Sohn, chief economist at Wells Fargo. “The economic recovery is almost three years old, and the economy should be producing 200,000 to 300,000 jobs per month. Obviously, the relationship between economic growth and employment has broken down.”

Treasury Secretary John Snow acknowledged the report was weak but said he was confident the economy was expanding even if jobs continued to lag. "The president’s tax plan has put the economy on a strong path and I’m confident we’re going to see jobs come back," he said in a CNBC interview.

Speaking separately to reporters in Florida, Snow said the weak labor market illustrates why Congress needs to ratify President Bush’s proposal to make permanent the sweeping tax cuts passed during his administration.

“The numbers suggest we need to keep the economy growing and reinforce our view that it would be a terrible mistake to raise taxes on American families and American businesses that are working to create jobs,” Snow said.

But Bush critics said the tax cuts are not even scheduled to expire for several years and have yet to deliver the job growth promised by the administration. Overall the economy has lost nearly 2.3 million jobs since Bush took office and has created just 343,000 jobs over the past six months. That compares with an average 321,000 jobs a month during the comparable point in the last expansion 10 years ago.

“At this rate the Bush administration won’t create its first job for more than 10 years,” Democratic presidential candidate John Kerry told reporters. “Americans have a clear choice in this election. They can either suffer with more and more job losses that rip the heart out of our economy, or they can give George Bush a new job.”

Stock prices were little changed late Friday, but market interest rates fell sharply, meaning that mortgage rates are likely to head lower. The yield on the 10-year Treasury bond, often used to set fixed mortgage rates, fell to 3.82 percent, its lowest level since July, from 4.02 percent a day earlier.

Prices on futures indicate traders now see almost no chance the Fed will raise rates by midyear, down from a 40 percent chance a day earlier. The chances of a hike by  September fell to around 40 percent from 90 percent.

Major Market Indices

“What happened today puts a huge hole in any argument for a rate hike in the spring,” said Ethan Harris, chief U.S. economist for Lehman Bros. “The Fed is smart enough to understand they need to keep their foot firmly on the accelerator.”

At least one brokerage economist pushed back his projection for an initial Fed rate hike from August to November, and many analysts believe the central bank will leave rates unchanged until next year. The central bank began pushing rates lower in early 2001, finally setting the benchmark federal funds rate at 1 percent last June, the lowest level since 1958.

That stimulates the economy by making it cheap for consumers and businesses to borrow money. The economy has plenty of excess labor and production capacity with little sign of increasing inflation, so the Fed has little incentive to raise rates.

“A few more numbers like this and folks are going to start talking about a Fed ease instead of a tightening,” said David Rosenberg, chief North American economist at Merrill Lynch.

Nobody suggested the economy is in any danger of slipping back into recession, but Rosenberg said growth could slow to “unpalatable” levels in the second half of this year after a burst of stimulus from an expected surge in tax refunds over the next several months.

“You’ve got to question what is going to happen in the second half of this year because the economy is so dependent on consumer spending,” agreed Mary Ann Hurley, a bond trader at D.A. Davidson & Co. in Seattle.

Although business confidence has been strong, consumer confidence fell sharply last month, largely because consumers have turned more gloomy on the outlook for jobs and the economy in general. Consumer confidence is critical because consumer spending drives 70 percent of the nation’s $11 trillion economy.

The lack of job growth has allowed employers to keep wage gains down, meaning that any gains in income have come mainly from tax cuts, mortgage refinancing and an improving stock market. Hourly wages are up only 1.6 percent over the past year, the lowest year-over-year gain since 1986 and slightly below the 1.9 percent consumer inflation rate. That means hourly workers are barely keeping up with the rising cost of living.

“There definitely are two parts of the economy out there,” said Harris of Lehman Bros.

“Certainly for people who are out of work, its a grim job-hunting process," he said. "An increasing number of people are giving up the job search. … But if you have a job and have assets, you’re actually feeling OK about the world.”

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