Job fair
Robyn Beck  /  AFP - Getty Images
Susan and Pat Lawson, owners of Temps Unlimited employment agency, fill out forms at a 'Back to Business' forum in New Orleans this month. Hurricane Katrina helped push up the nation's jobless rate to 5.1 percent from 4.9 percent in August.
By Martin Wolk Executive business editor
msnbc.com
updated 10/7/2005 3:01:26 PM ET 2005-10-07T19:01:26

The economy lost only 35,000 jobs last month despite the devastation left by Hurricane Katrina, the government estimated Friday in a report that showed payrolls expanding steadily outside the storm-slammed Gulf Coast region.  The nation’s jobless rate edged up to 5.1 percent from 4.9 percent.

Analysts said the report needed to be treated with caution due to the difficulty of tracking the thousands of individuals and businesses displaced by the storm. But the apparent underlying strength in the economy — including revisions showing that employers added 77,000 more jobs in July and August than previously estimated — fortified the view of many economists and investors that the Federal Reserve will continue raising interest rates well into 2006.

“Overall the economy remains quite healthy despite the rise in energy costs which had taken place even in the month of August,” said Bank of America economist Lynn Reaser. “If one takes the number at face value there is a suggestion that the immediate damage of the hurricane was less than expected and/or the rest of the economy was much stronger.”

Financial markets took the report in stride although earlier in the week stock prices fell sharply on concerns that the Fed will be more aggressive than expected in raising interest rates to keep a lid on inflation.

Dallas Fed President Richard Fisher, who twice warned this week that inflation was rising to the top of the Fed’s “tolerance zone,” kept any new insights to himself Friday, opening a speech in Waco, Texas, by declaring he would not comment further on monetary policy.

The widely watched Dow Jones industrial average, which had closed Thursday at its  lowest level in three months, was up about 0.2 percent in afternoon trading.

The employment report was the government’s first assessment of how the economy performed in September and came loaded with caveats given how hard it was for survey teams to reach businesses and households in the devastated regions around New Orleans and on Missisippi’s Gulf Coast. The survey period ended Sept. 12 and therefore did not reflect the impact of Hurricane Rita, which swept through parts of Texas and Louisiana late in the month.

An official of the Bureau of Labor Statistics said that if there had been no hurricane the economy probably would have added about 195,000 jobs in September, in line with the past year’s average, suggesting that Friday’s report reflected 230,000 jobs lost due to Katrina. Weekly reports filed in Louisiana and Mississippi since the hurricane indicate that 363,000 people already have filed for unemployment insurance due to the storm.

“I think you have to be somewhat skeptical about the payroll number,” said Bill Dudley, chief U.S. economist at Goldman Sachs.

Still, he said the report indicated that “the labor market had a lot of upward momentum pre-Katrina.” And he noted that average hourly earnings rose only 0.2 percent in September, meaning that wage inflation — a growing worry for the inflation-conscious Fed — is still being kept well in check.

Wages have been rising at a 3 percent annual rate in recent months, up from 2 percent last year, “but this is still surprisingly soft given the tightening of the labor market and the increase in headline inflation,” Dudley said in a note.

Major Market Indices

Nevertheless he expects the Fed will raise its benchmark overnight rate to 5 percent by mid-2006, up from 3.75 percent currently, partly because post-hurricane rebuilding will add to economic growth next year.

“The wage number from the report was quite benign, but it does reaffirm the Federal Reserve’s view that the economy was quite resilient, and the risk is probably still on the side of higher inflation,” said Reaser. “So by this report they would be justified in maintaining the pace of gradual rate increases.”

Fed Chairman Alan Greenspan and his colleagues have raised the overnight federal funds rate by a quarter-percentage point at every scheduled meeting since mid-2004 and are generally expected to continue the trend when they next meet Nov. 1.

Although the economy lost jobs last month for the first time in two years, there was considerable strength in many industries, analysts said. The health care industry added 37,000 jobs, construction added 23,000 and financial services added 11,000.

The hurricane might have added some jobs in temporary-help firms, the Labor Department said.

The retail sector lost 88,000 jobs after adjusting for seasonal factors — a result that probably was affected by the hurricane but still raised concern going into the important holiday sales season, which normally boosts employment in the sector.

“This does not bode well for holiday job seekers,” said John Challenger of outplacement firm Challenger, Gray & Christmas. “Holiday hiring usually does not begin until mid- to late October, but we typically do not see such large declines in retail payrolls heading into the all-important holiday shopping season.”

Although the economy has held up well despite the sharp increases in gasoline prices, some analysts fear holiday sales could be dampened when consumers in cold-weather regions are hit with their first heating bills of the season.

Meanwhile, President Bush — with approval ratings near a low point — is feeling the sting of anxious consumers whose confidence has been rattled by high energy prices and economic uncertainties exacerbated by the natural disasters.

Consumer confidence remains low, with high energy prices, war and fallout from hurricanes Katrina and Rita sapping American’s enthusiasm about the nation’s economic health and their own.

The Associated Press contributed to this report.

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