Jobs: Bad January Fuels Recession Fears

A payrolls decline of 17,000 on the monthfar below what the market expectedhas amped up talk of a U.S. economic downturn

By BW, S&P, and Action Economics Staff

The latest news on January's labor market suggests that the U.S. economy may be slipping into a recession. On Feb. 1, the Labor Dept.'s employment report for January showed that nonfarm payrolls fell 17,000 during the month, a surprise for the markets, which had expected a 55,000 rise. The decline marked the first negative payrolls figure since August, 2003.

The unemployment rate, however, fell to 4.9% from the 5.0% reported for December—not unexpected, since many felt the 0.3-percentage-point jump in December was not believable, according to S&P Economics. Some of the sting of the weak employment was offset by a sharp upward revision of the December change, to 82,000 from the 18,000 reported a month ago.

The biggest declines were in construction and manufacturing (down 27,000 and 28,000, respectively). The annual revision to the payroll report reduced the level of employment in December by 376,000, in line with earlier estimates for the Labor Dept.

Expecting Another Rate Cut

Average weekly hours dropped 0.1 to 33.7. Average hourly earnings rose 4 cents (0.2%), confirming the lack of imminent inflation risk, says S&P, which adds that the report is further evidence that the economy is moving into recession.

"We expect to see another rate cut in March unless the evidence changes next month," wrote S&P economists in a Feb. 1 note.

Treasury prices moved higher, and yields slid lower, following the release of the report. Action Economics notes that the sharp upward revision in December payrolls, alongside a downward revision in November to a 60,000 gain from 115,000, results in a net 9,000 addition overall for the three months.

"Overall the data has a negative skew that should keep the bid in Treasuries for now, keep stocks defensive, and weigh on the dollar," wrote Action analysts on Feb. 1.

The yield on the 10-year note plunged 5 basis points to dip under 3.60% on Feb. 1.

Report Tempers Stocks' Pre-Open Boost

U.S. equities reversed course following the weak payrolls data, which squashed sentiment after stocks had been boosted sharply ahead of the open following news of a potential massive $44.6 billion merger between Microsoft (MSFT) and Yahoo (YHOO).

"These poor jobs data are the strongest evidence so far that the economic expansion is grinding to a halt," said Peter Morici, a professor at the University of Maryland School of Business. "The economy is in recession mode."

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