January 9, 2004

U.S. Companies Added Few Workers in December


Employers added only 1,000 new workers to the nation's payrolls last month, the Labor Department reported today, providing further evidence that the economic recovery is continuing to elude the labor market.

The stagnation in job creation occurred even though the nation's unemployment rate fell to 5.7 percent in December from 5.9 percent in November.

The weak labor market called into question other measures, like weekly unemployment claims, that had suggested a firming jobs picture in December. And it came as a major surprise to most economists. Before the release of the employment figures, the consensus estimate on Wall Street projected an increase of 150,000 jobs in nonfarm payroll employment.

"There are structural impediments to new job creation," William V. Sullivan, a senior vice president at Morgan Stanley, said on CNBC this morning shortly after the figures were released. "Those impediments remain as 2003 came to a close. Everybody has to be disappointed with these numbers."

Not only was the December jobs number weaker than expected, but the Labor Department also revised downward the gains reported in October and November.

As a result of the revisions, payroll employment grew by 43,000 jobs in November, down from 57,000 as originally reported. The October gain was revised down to 100,000, from 137,000 previously.

In a message to clients after the release of the job numbers, David Rosenberg, chief economist at Merrill Lynch, noted that with the revisions the economy had failed to generate more than 100,000 jobs for 11 straight months.

"This is a streak that has never happened before, outside of recessions, at any time over the past 50 years, Mr. Rosenberg wrote."

He added that at this stage of an economic expansion, the "typical" monthly increase in payroll employment is 145,000.

President Bush expressed mixed feelings about the latest jobs figures. "That's not good enough," he told a group of businesswomen in a gathering at the Commerce Department. "We want more people still working. But nevertheless, it is a positive sign that the economy is getting better."

He added: "I know what we have overcome in this country. I mean, this economy has got to be pretty darn strong to have come through what this nation has come through."

On the surface, the drop in the unemployment rate looks like good news. But the lower number is due to the fact that the overall labor market shrank by 309,000 workers in December, the government said.

The decline in the labor market pushed the labor force participation rate, which measures the number of people who work as a percentage of the overall labor force, to its lowest level since August 1991.

Recent data from organizations like the Institute of Supply Management have suggested that hiring in the manufacturing sector is starting to take place. But the data released today belie that notion.

Manufacturing employment, which has been falling for more than three years, declined by another 26,000 jobs last month. And the nation's retailers, who normally add jobs in December to cope with the holiday sales season, instead shed 38,000 employees.

The weak employment report encouraged bond traders, who saw it as another sign that the Federal Reserve would not be in a hurry to raise short-term interest rates any time soon. Prices of Treasury securities rose and interest rates fell. By this afternoon, the Treasury's benchmark 10-year note was up more than a point in price, while its yield, which moves in the opposite direction, declined to 4.11 percent from 4.25 percent late Thursday.

The stock market, meanwhile, was disappointed by the December jobs report. All three major market averages fell in early trading, although they later recovered some ground. By this afternoon, the Standard & Poor's 500-stock index was trading down 3.22 points, or 0.3 percent, to 1,128.70.

Analysts said the job figures once again underscore continuing trends like outsourcing and labor-saving technological gains. Those trends, while greatly enhancing productivity, suggest that much faster economic growth will be needed to generate a meaningful increase in employment.

"If you want to make a real dent in unemployment, you are going to need more than 4 percent growth in the economy," said Robert v. DiClemente, chief economist for the United States at Solomon Smith Barney. "In a very uncertain world, companies are reluctant to make commitments."

Those that do have jobs are not seeing wages go up very much.

Average hourly earnings rose just 0.2 percent in December, the Labor Department said. On a year over year basis, wages rose by 2 percent in December.

On CNBC, Mr. Sullivan from Morgan Stanley said the year-over-year increase in wages was the lowest since 1987. Once again, the number of temporary employees rose in December.

"The trend toward contract employment is here to stay," said David Wyss, chief economist at the Standard & Poor's Corporation. "In part, that's because people like it. But it is also because employers are trying to control rising health care costs."

The Department of Health and Human Services reported that spending on health care shot up 9.3 percent in 2002, the largest increase in 11 years, to 1.55 trillion dollars. Hospital care and prescription drugs accounted for much of the increase.

Analysts said the job figures — both new and revised — would not alter their fourth-quarter growth forecast. Most economists project the economy expanded at a better than 4 percent rate in the last three months of 2003.

Still, they acknowledged that the jobs report provides little or no reason to policy makers at the Federal Reserve to alter their current stance on monetary policy.

The overnight federal funds rate, the rate the Fed most closely controls, is likely to stay at its current level of 1 percent for many more months, the analysts said.

Members of the Fed's policy-making Open Market Committee are scheduled to hold two days of meetings Jan. 26 and 27.

"The Fed would like to see more employment growth," said Ray Stone, a managing director at Stone & McCarthy Research Associates, an economics consulting firm in Princeton, N.J. "These numbers have to be a disappointment."

The jobs figures also leave a potentially potent political issue on the table for Democratic candidates in the run-up to upcoming presidential caucuses and primaries.

"The modest job growth of the last few months pales in comparison to the number of jobs lost under Bush's watch — 2.3 million — and falls far short of the president's promise last year that his tax cuts and economic program would generate more than 300,000 jobs a month," John Sweeney, president of the AFL-CIO, said in a statement.

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