U.S. labor market starting to show some weakening

03/18/2007

Unemployment report next Friday expected to show slower job growth in Feb.


WASHINGTON (MarketWatch) -- The American labor market, after showing surprising strength over the second half of 2006 even as the economy slowed down, is expected to begin to finally show some wear and tear, economists said.

"The job market is starting to look a little more shaky," said the economic team at Merrill Lynch in a research note.
Job growth is expected to slow to 100,000 jobs in February after averaging 155,000 over the past four months.

Many economists are forecasting job growth below 100,000, which would be the first month with sub-100,000 job growth since January 2005. January job growth was 111,000.

The jobless rate is expected to remain at 4.6% in February although some economists have it ticking up to 4.7%. Average hourly earnings should rise 0.3%, with the workweek steady at 33.8 hours.

The employment report for February will be released on Friday at 8:30 a.m. Eastern. It will be the most closely-watched indicator of the week.

One factor behind the weakness is that claims for unemployment insurance have worsened over the past four weeks. The four-week average of new unemployment claims climbed to the highest level since October 2005. See full story.

Another part of the decline is likely to be weather-related, as the return of cold weather likely slowed down hiring in the construction industry, economists said.

The manufacturing sector is expected to continue to shed jobs.

Richard Moody, chief economist at Mission Residential, forecast 65,000 jobs were created in February. He said two sectors with strong growth in 2006, tourism and health care, are beginning to slow down.

Nigel Gault, director of U.S. research at Global Insight, forecast job growth of 120,000 in February. He said service sector employment should rebound.

If the job report is weak, would it be the start of an inevitable slide towards a recession? Analysts said they don't think so. In any case, one month's data won't settle the matter.

One of the most pessimistic economists, James O'Sullivan, economist at UBS, expects the unemployment rate to trend up in coming months, leading the Fed to cut interest rates by 100 basis points over the second half of the year. But even O'Sullivan doesn't see a recession.

Rather than anything dramatic like a recession, economists see the economy stuck at a rate not much faster than the 2.2% growth rate in the fourth quarter.

As a result the labor market should remain soft in coming months.

Fed officials should not be too concerned by a weak job report. Top Fed officials, particularly Janet Yellen, the president of the San Francisco Fed, have said they were puzzled that the labor market had remained so strong in the fall and winter even as growth slowed. See full story.

So weakness in the labor market might allow the Fed to remove its bias toward further rate hikes.

In other data, the trade gap is expected to narrow slightly to $60.3 billion from $61.2 billion in December. Economists said it was too soon to say the trade gap is on a downward trend.

The Commerce Department will release the January trade data at 8:30 a.m. Eastern on Friday.

The government will revise fourth-quarter productivity data on Tuesday. Economists see a downward revision to 1.7% annualized from 3.0%, while unit labor costs -- a key inflation gauge -- could rise to 3.3% annualized from 1.7% earlier.