'The Worst Is Over'

It looks like the recession that wasn't — not with unemployment holding steady at 4.2 percent. The Department of Labor reported Friday that people were still working in large numbers in February — earning more, with average hourly earnings back on the grow after a flat January, and working more, with the non-farm payroll up 135,000 jobs for the short month. And it had nothing to do with the tax cut.

TIME senior economics reporter Bernard Baumohl looked at the report and predicted that the worst was over.

What does the report look like?

BB: The economic forecasters expected unemployment to go up, but it doesn't look like it's budging. Non-farm payroll is up by 135,000 jobs. Average hourly earnings, which were flat in January, are growing again. People are working, and they're earning more money.

It's an indication that they're going to spend in the months ahead, despite what sentiments the consumer confidence numbers have been indicating. The economy has slowed down, and we're probably going to see 1 or 2 percent for the first quarter of this year, but the momentum is for more growth rather than less. With consumers spending, the inventory correction will probably be finished in the next month or two, at which point production will go up on its own. The worst is over.

What does this mean for the Fed?

BB: The Fed has to ask a very interesting question: Is the economy growing again on its own, or does it need additional momentum? My guess is that they'll cut rates on March 20, but just by 25 basis points. Because they don't want to overstimulate. These cuts are going to have their greatest impact six or nine months down the road, which could be the same time the economy really picks back up. My long-term guess is that the Fed will end up having to take that quarter-point back near the end of the year.

The markets sure didn't like it. The Dow lost almost 200 points, and the NASDAQ nearly 100, by noon.

BB: Well, the markets had already discounted in a 50-basis point cut on March 20, and they were disappointed. At a time when they're desperate for improved revenue outlooks, they have their hearts set on cheaper money because it changes the valuations of the stock.

But I think they'll get over it soon enough. If the economy recovers and the correction runs its course soon, businesses are going to start to turn profits again. And they've got to realize that helps them. This sell-off could be mostly erased by the end of the day.

Big picture?

It does seem as if the New Economy has lived up to its expectations and avoided a recession. Enough businesses are using these computerized systems that their inventories are very sensitive, and when there's a correction to be made they can make the adjustment quickly. There's enough data now to indicate that the trough of this was in November-December. Despite the size of those layoff numbers in the newspapers, Americans are still by and large working, and earning, what they did before, and companies are now going to be reluctant to let any more skilled workers go, now that there's a light at the end of the tunnel.

This may be a slow, U-shaped recovery, as opposed to a V-shaped one, but it definitely looks like a recovery. We dodged the bullet.

And the markets?

Remember, historically the markets have posted double-digit gains in the year the Fed starts cutting rates. Businesses are cutting costs and clearing surplus inventory, and if people keep working and shopping, the companies are going to be profitable again. I think right now, we're back in a bull market.