Good and Bad News in Job Numbers

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What's the economic message of the latest unemployment figures?

Well, the numbers have held steady even though they show the sharpest increase in first-time unemployment claims in two years. What this means is that although the slowing economy is seeing more people laid off, there are not larger numbers of new workers coming onto the job market. That means the job market remains tight, which makes the Fed's job very difficult.

A tight labor market actually makes it difficult for the Fed to make further cuts in interest rates. If the Fed continues to cut with unemployment at a low 4 percent, that raises the danger of wage inflation later this year. And wage inflation is the most difficult form of inflation to contain — it gets deeply embedded into the economy for years, because it often involves employment contracts. So the Fed has a tough job on its hands. It has detected enough signs that the economy is teetering on recession to make an aggressive rates cut. But we're staring at recession with unemployment being near a 30-year low, which is almost unprecedented. Usually you have the reverse — when the economy sinks, unemployment rises.

But the economy is no longer creating jobs at the same rate...

Yes, new payroll jobs rose just 49,000. In fact, over the last six months, new jobs grew at an average of 50,000 a month. But in the two years before those six months, the average growth in new jobs had been 252,000 a month. So the economy is clearly slowing sharply. But the unemployment numbers are holding steady, because the job market itself isn't growing — there may be fewer new jobs, but there are also fewer new workers seeking jobs. It's the first time in 50 years where we are staring at a possible recession with unemployment being at its lowest in a generation.

So what are employers thinking?

In spite of the growth in layoffs, many companies are clearly reluctant to retrench large numbers of workers. They've spent so much time finding and training their workforce in a tight labor market that many companies are thinking that if this a shallow recession, they'd rather tough it out. They don't want to be left having to replace their workforce if the economy picks up quickly, which is what they're hoping the Fed's rate cuts will achieve. So we're not likely to see a quick rise in unemployment.

So what is the overall impact of these numbers?

Not necessarily negative. By big corporations holding on to their workforce, these people are still working, still getting paid, and therefore still providing a basis for consumer spending. If unemployment had risen, consumer confidence would have slowed even faster. These numbers mean consumer confidence may not fall further, and could even pick up again by the summer. On the whole these are interesting and even beneficial number for the economy.

What about the Fed's quarter-point cut in the discount rate announced after trading hours Thursday?

That's not particularly important. Usually the Fed only lowers the discount rate after a request by the member banks. So it's a technical move — a procedural matter. It brings the two interest rates into alignment, but doesn't say more about the Fed's thinking than the cut earlier this week has already said.