By Martin Wolk Executive business editor
updated 7/2/2004 4:32:08 PM ET 2004-07-02T20:32:08

Friday’s disappointing employment report suggests the economy is cooling from last year’s red-hot pace of growth, making life easier for the Federal Reserve but harder for President Bush and his re-election campaign.

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After three straight months of strong employment growth that met or exceeded expectations, the economy added only 112,000 jobs in June, less than half what most analysts were looking for. The report was the latest of several indications suggesting that economic activity slowed sharply in June after a strong spring, although most forecasters said there was little cause for concern.

“What I believe and I hope this signals is that the economy is slowing from an unsustainably strong pace,” said Hugh Johnson, chief investment officer at First Albany. “My forecast is that the economy is slowing to a more sustainable pace, and I think that’s extremely good news.”

The Fed this week boosted a key interest rate for the first time in four years, citing improving labor market conditions and the “solid pace” of economic growth. Friday’s weak employment report makes it likely the central bank will continue raising rates at a  “measured” pace, as Chairman Alan Greenspan and his colleagues have projected.

Stock prices fell and bond prices rallied Friday after the job report was released, sending interest rates lower as many traders all but abandoned the idea the Fed will raise the benchmark federal funds rate a half-point in August. Most traders and analysts expect another quarter-point hike, matching the move this week that raised the rate to 1.25 percent – up from its lowest level since the 1950s.

David Rosenberg, chief North American economist at Merrill Lynch, said the Fed could even hold rates steady in August if the July employment report is weak as well. Although the June report was a surprise, it was not an isolated indicator of a slowdown in economic activity, Rosenberg said.

Several major retailers including giants Wal-Mart and Target have reported sluggish sales, and General Motors and Ford both reported unexpectedly large sales downturns in June. Hourly wages were up only 0.1 percent in June, easing any concern about wage inflation. The unemployment rate, at 5.6 percent, has been virtually unchanged since December, as the economy creates just enough jobs to absorb workers entering – or re-entering – the work force.

“We’ve seen a sudden and sharp loss of momentum,” said Rosenberg. “We’re getting an early taste of what the economy looks like when we go from monetary and fiscal stimulus to restraint.”

President Bush Friday highlighted the fact that the economy has created 1.5 million jobs since August, a sharp turnaround from the recession of 2001 and long jobless recovery that followed.

“We're witnessing steady growth, steady growth, and that's important,” Bush told a gathering of small-business owners at the White House. “We don't need boom or bust type growth, we want just steady, consistent growth, so that our fellow citizens will be able to find a job.”

Bush’s Democratic rival Sen. John Kerry and his advisers have assailed Bush for the weakest record on job creation since the Great Depression.

“Scarce jobs, flat wages, rising inflation and big corporate profits are not a recipe for an economic recovery that touches middle-class families,” said Rep. Rahm Emanuel, D-Ill., a close supporter of Kerry's.

But even with growth slowing the economy still appears to be expanding rapidly enough to help Bush in his re-election efforts, analysts say.

Last year at this time the economy was still losing jobs every month, noted Johnson.

“The Bush administration would like (job growth) to be stronger, and it certainly raises some doubts, but he still can hang his hat on the fact that the economy is expanding,” Johnson said. “It is no longer a jobless recovery, it is a job-creation recovery.”

“If  consumers just roll over and play dead, that is a whole different story,” said Larry Horwitz, senior economist at Decision Economics, a consulting firm. “Right now the odds are much more in favor of a significant improvement in the economy rather than the reverse.”

One major disappointment in the latest report was that the manufacturing sector, after adding jobs for four straight months, lost 11,000 jobs. Manufacturing jobs are closely watched as a cyclical indicator of the economy’s health and because they tend to pay more than service-sector jobs.

Continued weak job growth could renew the focus on outsourcing of manufacturing jobs in the final months leading up to the November election, Horwitz said.

The weakness in manufacturing appears to correlate to more low-wage jobs, according to economists at Wells Fargo. A study by the bank found that 60 percent of net new jobs created since August have been low-wage jobs, defined as jobs with wages below the national median. The remaining 40 percent of new jobs have above-median wages. By contrast in the 1993 expansion 54 percent of the new jobs were considered low-wage, while 46 percent paid above the national median.

“This suggests the wealth and income creation from the new jobs will be less than what we saw in the 1994 rebound,” said the report, written by economist Scott Anderson. “Still, we are in the early stages of the jobs recovery, and there is still time for higher-wage jobs to be created before this cycle ends.”

One positive effect of the slow job growth is that mortgage rates probably will not be rising significantly anytime soon. Home sales soared in May to record levels, possibly because buyers rushed to close deals as mortgage rates began to head higher in the spring. But rates on long-term fixed-rate mortgages have held steady or fallen in recent weeks and likely will fall further in coming days.

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