Anyone hoping the opening shots of the war in Iraq might have boosted the sluggish economy is unlikely to find any evidence in Friday’s key employment report, which is expected to show another month of labor weakness. In fact, the monthly Labor Department employment surveys generally reflect conditions in the second week of the month, so the upcoming report will not contain any data collected after the war’s first missiles were fired March 19.
In any case, even economists who believe war is the main obstacle to stronger U.S. growth say it is far too early to see any effect outside of financial markets, which have fluctuated widely in emotional response to daily dispatches from the battle zone. Until it becomes clear that U.S.-led forces will win a decisive victory without being dragged into a prolonged conflict, consumers will be hesitant to spend and businesses to invest and hire workers, these economists say.
So even in a best-case scenario, analysts expect the recent string of weak data to continue playing out for several weeks, and Friday’s March employment report is unlikely to be an exception. On average analysts expect payroll jobs, already at their lowest level in more than three years, to drop another 50,000 on top of the 308,000 jobs lost in February. The politically potent unemployment rate is expected to tick up slightly to 5.9 percent from 5.8 percent.
“The only thing that March has going for it compared to February is that the weather was better,” said Kurt Karl, New York-based chief economist for Swiss Re, the reinsurance giant. Improved weather after February’s severe winter storms could help boost employment in the construction industry, he said. And he and other analysts said February job losses probably were exaggerated by the activation of military reserves who may not have been replaced by temporary workers either because of timing issues or cost-cutting.
But the government reported Thursday that in the last week of March to 445,000 — much higher than expected, and the highest level in almost a year. That raises the odds that the monthly employment figures will be worse than the consensus estimate, said Stan Shipley, senior economist at Merrill Lynch.
“This data points to a substantial job loss in March,” he said in a note to clients. Merrill Lynch estimates that payrolls will show a drop of 85,000 and the jobless rate will rise to 6 percent.
Government spending prop
The labor situation would be even worse were it not for the steadying influence of government spending, said Jared Bernstein, senior economist for the liberal Economic Policy Institute. He pointed out that in the two years since recession began in March 2001, the economy has lost 2.5 million private-sector jobs, or 2.2 percent of the total, worse than at any comparable point of the business cycle in the postwar era.
“It used to be in a good, old-fashioned recovery you’d get a big trough and a big kick coming out of it,” he said. “What we’ve had the last two times around are pretty shallow downturns without a lot of bounceback coming out of it.”
Some economists believe another weak job report could help push the Federal Reserve to cut short-term interest rates again, even before the next scheduled meeting of policy-makers May 6. But Bernstein suggested that a “targeted, temporary” fiscal stimulus measure including a heavy dose of relief for strapped state governments could do far more to help the economy than lowering rates from current historically low levels.
“It’s hard for me to imagine that the cost of capital right now is what is constraining investment,” he said.
Few signs of improvement
Even if job losses have peaked for now, there have been few signs of any economic improvement.
“All the data we have seen in the past couple of months have pointed to a down economy,” said Mark Zandi, chief economist of Economy.com, a forecasting firm. “There is no evidence that things have gotten any better.”
Among the most disturbing recent data was the widely watched monthly ISM survey, which showed the manufacturing sector last month turned in its worst performance since November 2001, shrinking after several months of modest expansion. Other reports have shown that housing and auto sales, two pillars of the economy in recent years, are beginning to show signs of a slowdown.
“Everything we’re looking at is bleak and bleaker,” said Robert Brusca, president of Ecobest Consulting. He said that even if the “end game” in Iraq goes well for U.S.-led forces, a long list of geopolitical uncertainties is lined up behind it, including the continued threat of terrorism, the nuclear standoff in North Korea and even the troubling new respiratory illness sweeping through Asia, which threatens to further weaken the region’s economically vital travel industry.
Not everyone shares Brusca’s pessimism. Zandi, for one, said the fog of war has settled over the economy, making it impossible to predict whether it will emerge from its current “soft patch,” as Fed Chairman Alan Greenspan describes it, or fade back into full-fledged recession.
“The problem is … that no one can attach a probability to any of the possible scenarios,” Zandi said. “If you can’t attach a probability, you can’t look beyond the TV set, you can’t look beyond the war. I think people are at best frozen. And the longer this drags out, the higher the odds they are going to pull back.”