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Job Growth Disappoints -- Again

The current economic recovery is looking increasingly "jobless," if judged by the February employment report released on Mar. 5. The data for February were terrible, with nonfarm payrolls inching up just 21,000, vs. economists' forecasts for gains of 110,000 to 130,000. The jobless rate came in at 5.6%, near expectations. January job growth was revised downward to 97,000, from 112,000.

The good news from the report is that factories lost only 3,000 jobs. Other than that, there were few redeeming details. The average workweek was 33.8, unchanged from January. Retail employment was up 13,000, while average hourly earnings grew 0.2%. Service jobs (excluding retail) gained just 33,000, with 32,000 of those temporary positions. Construction shed 24,000 jobs.

OUTPUT VS. EMPLOYMENT. Households reported a 265,000 decline in employment. Total private employment was flat, with government accounting for 32,000 new jobs. There was a tiny expansion in factory hours to 41.0, from 40.9, with overtime flat at 4.5 hours. Both average hourly and weekly earnings, however, showed slower year-over-year growth in February than in January. Hourly earnings were up 1.6%, vs. 2.0%, while weekly earnings were up 1.9%, vs. 2.0%.

Stepping back a bit, it's clear that the U.S. economy has stopped losing jobs. While payrolls growth has been weak in recent months, there hasn't been a decline in employment since last August. During the latter half of 2003, economic output grew at roughly a 6% annual pace, and is thought to be growing at a 4%-plus pace in the first quarter. Meanwhile, since the contraction in employment ended, the average monthly rise in employment has been just 61,000.

The concern is that 61,000 jobs a month may not be adequate to support output growth. The hope was that a lag in hiring was the problem, so pressure to hire would mount. The alternative scenario is that managers aren't feeling relief from better margins and continue to feel pressure to hold payrolls down. Instead, they're relying on efficiency gains. It's worth noting that most capital investment so far seems aimed at improving plants, rather than expanding them. This supports the second, tight-fisted view of managerial behavior.

PRESSURE OFF GREENSPAN. How might the report be viewed by Federal Reserve policymakers? Normally, one month's worth of disappointing data isn't supposed to influence policymakers, who are careful to look at broader trends. But this particular release does mean a good bit. There were very strong expectations for the February data, relative to what we've seen over the past two years, if not compared to the longer historic standard. And yet another downside miss adds weight to the argument that productivity gains are continuing, and that any given rate of economic growth will lead to job growth that's less than the long-term norm.

The bottom line: The weak February employment report enables Alan Greenspan & Co. to remain patient on policy on the assumption that jobs growth won't pick up as rapidly as hoped. As Fed officials have said, it's the data and not the calendar that matters. And the data from the February jobs update say the Fed won't hike rates for a long time. From Informa Global Markets staff analysts

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