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A good report for a bad economy

Friday’s employment report overstates the strength of the labor market but contains some encouraging signs.  By Martin Wolk
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In an economy — heck, a world — starved for good news, Friday’s report showing the strongest job growth in more than two years has to be welcomed as an encouraging sign. And while economists say it is far too soon to conclude the sluggish economy has emerged from its soft patch, there certainly are reasons for optimism in the report.

Most analysts agree that the closely watched report showing the economy added 143,000 jobs last month was heavily distorted by seasonal adjustment factors stemming from relatively light retail hiring over the holiday season. True, the job growth was far stronger than even the most optimistic forecasts, but it was offset by a large negative revision to December’s numbers.

All told the latest revisions show the economy lost 94,000 jobs over the past three months, a performance that can only be described as weak at best. President Bush, far from crowing about the report, repeated the vow he made in his State of the Union address last week, saying: “We will not be satisfied until this economy grows fast enough to employ every man and woman who seeks a job.”

The more surprising news that the unemployment rate dropped to 5.7 percent from 6 percent also was considered something of an anomaly, implying as it did that the economy added 1.1 million jobs in January. The Labor Department said it had made significant changes in the household survey used to come up with the unemployment rate, and therefore the rate is “not directly comparable with earlier data.”

All that said, economists saw a positive sign in the news that the manufacturing sector appears to have stopped hemorrhaging jobs, confirming earlier indications that the hard-hit sector at last is turning a corner.

The manufacturing sector lost only 16,000 jobs last month, compared with an average of 57,000 over the previous five months. The overall goods-producing sector, which includes mining and construction, was unchanged after losing jobs for 25 straight months.

“We’re not completely on firm ground, but we are looking better than we were a few months ago,” said Tim O’Neill, chief economist for the Bank of Montreal. O’Neill is one of the more optimistic economic forecasters in the business world, projecting growth of 3 percent in the current quarter and 3.5 percent next quarter, compared with the feeble 0.7 percent rate last quarter.

He cautioned against reading too much into the January report but said it was certainly an improvement over recent months.

“It’s actually a more mixed report than the headline figure would suggest, but better than the unremitting gloom of the last several employment reports,” he said.

Still, uncertainty over an increasingly likely war in Iraq and the unrelenting threat of terrorism appears to have dampened any enthusiasm over the job figures, at least on Wall Street. Stock prices initially rose Friday after the employment report was issued but then faded in a sell-off that some analysts attributed to the Bush administration’s decision to raise the terrorist threat level one notch to code Orange.

“We can’t get around this thing,” said Brian Jones, an economist with Salomon Smith Barney. “My own sense is (the Iraq situation) is the main thing holding back the economy right now.”

When Federal Reserve Chairman Alan Greenspan delivers his semi-annual report on the economy to Congress next week, it seems more likely he will stress geopolitical uncertainties rather than one positive month of employment data, said Sung Won Sohn, chief economist for Wells Fargo.

“Geopolitics really is dominating the picture,” Sohn said. “I think he will try to emphasize (central bankers) are not going to try to do anything for a while until the cloud cover moves out,” he said. “I’m not sure how much Greenspan can do now anyway.”

Other analysts say the economy could use a jolt of fiscal stimulus to boost it from its torpor, but prospects for Bush’s proposed dividend tax cut, the centerpiece of his economic program, appear to have stalled in Congress for now. That could change in a hurry, however, if the United States and its allies score a quick victory in Iraq, handing Bush the mandate he still needs to accomplish his domestic agenda.

“I think the most important development would be to get some resolution on Iraq,” said Mark Vitner, an economist at Wachovia Securities. “Until that happens I don’t think hiring is going to pick up all that much. Right now companies just don’t feel confident enough to move forward with hiring decisions.”