By Martin Wolk Executive business editor
msnbc.com
updated 6/3/2004 5:40:08 PM ET 2004-06-03T21:40:08

The nation’s employers are expected to turn in a third straight month of strong job growth Friday, clearing the way for the Federal Reserve to begin raising short-term interest rates, possibly within a few weeks.

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Analysts expect the Labor Department to report the economy added about 223,000 jobs last month, bringing the total to more than 1 million for the year to date. If the figures come in as expected, the report will serve as confirmation that after a long jobless recovery, the economy is enjoying a robust, sustainable expansion that is producing enough new jobs to begin to bringing down the unemployment rate, analysts say.

“I think the last piece of the puzzle has fallen in place and the economy is firing on all cylinders," said Sung Won Sohn, chief economist at Wells Fargo. "It's especially encouraging that manufacturing has come back."

If the employment figure falls short, however, it would be a troubling development that would provide fresh campaign fodder to Democratic presidential hopeful John Kerry, who has shifted focus in recent weeks from the economy to Iraq and the war on terror, areas where President Bush suddenly seems more vulnerable.

"If tomorrow disappoints — and I don't expect it will — that will create a great deal of confusion," said Jared Bernstein, senior economist at the liberal Economic Policy Institute. "The job market is so criticial to the recovery that if tomorrow is not a good report there will be a lot of gloomy faces. Two months doesn't make a trend, but three months — that really says something."

Many analysts expect the nation’s unemployment rate to dip to 5.5 percent, which would be the lowest level since 2001.

The brightening employment picture poses a fresh challenge to the Fed and its Chairman Alan Greenspan, who have waged a three-year battle to boost growth and fight inflation.

Most analysts now expect the central bank to raise short-term interest rates for the first time in more than four years when they conclude their next meeting of policy-makers June 30. And the expected quarter-point increase is likely to be only the first in a series of hikes as the Fed gradually brings up its benchmark rate, the lowest level in 46 years.

Bond traders say the market already is braced for an increase in the overnight federal funds rate from its current 1 percent to 1.75 percent by the end of the year.

Not everyone is convinced the Fed will move so soon. Sohn, for example, said he sees a 70 percent chance of an increase this month but said Greenspan might prefer instead to wait until after his scheduled congressional testimony in July, when he presumably would issue a clear signal of the central bank's intentions.

In a letter released Wednesday, Greenspan said the coming rate increase likely would be “measured” since there is still plenty of slack in the labor market and little inflation pressure. Some traders have been concerned that the Fed might push rates up aggressively as it did in 1994 after the last recession in 1994. At that time the central bank hiked its benchmark rate from 3 percent to 6 percent in less than a year.

In his letter to Sen. Paul Sarbanes, D-Md., Greenspan cautioned against reading too much into historical patterns.

The Labor Department reported Thursday that initial claims for jobless benefits dropped slightly to 339,000, roughly in line with expectations. More than 3 million people are currently getting unemployment benefits, down from a peak of 3.7 million but still well above the 2 million who were collecting benefits before the recession began in March 2001.

Analysts have been more encouraged by surveys published this week by the Institute for Supply Management, considered a fairly accurate advance indicator of economic trends. The employment gauge of the ISM’s manufacturing index rose this week to its highest level in over 30 years and now has risen in eight of the last nine months, said Goldman Sachs economist Andrew Tilton.

That is good news for the battered manufacturing sector, which has finally begin adding jobs after shrinking for 43 straight months.

“Together with other evidence from the ISM survey — solid orders and shipments, along with slowing supplier deliveries — this pattern of indicators implies that firms are reaching capacity bottlenecks and, after keeping headcount down as long as possible, need additional labor to meet demand,” Tilton said in a note.

The ISM’s non-manufacturing index also reported an increase in its employment gauge to the highest level in nearly seven years.

But Lehman Bros. chief U.S. economist Ethan Harris cautioned that the manufacturing sector will never rebound to its pre-recession levels.

“Symbolically it’s a good thing to see strong job growth in manufacturing, but I think we all recognize we’re never going to get a lot of those jobs back,” he said. “We’re in a long secular trend toward the disappearance of manufacturing jobs, and that’s been accentuated by the competition from Asia and the surge in productivity.”

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