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Indicators Show a Cooling Economy

By Nell Henderson
Washington Post Staff Writer
Saturday, August 7, 2004

U.S. job growth nearly stalled last month, the government reported yesterday, reinforcing other signs that the economic recovery lost steam this summer, just months before the presidential election.

Employers added 32,000 workers to their payrolls in July, seasonally adjusted, the smallest monthly gain since December and the fourth consecutive month in which the pace of job growth has slowed, the Labor Department reported. Hiring also was weaker in May and June than previously thought, according to the department's revisions of earlier figures.

Democratic presidential candidate Sen. John F. Kerry (Mass.), shown visiting a Missouri family yesterday, used the job numbers as a chance to say his administration "could make it better." (Laura Rauch -- AP)

The unemployment rate edged down to 5.5 percent in July from 5.6 percent the month before, as more people did find work.

Stock prices plunged, with all three major stock indicators hitting lows for the year, as many investors saw the job figures as a sign the economy may continue to cool. The report provided new fodder for the campaign debate over the effectiveness of President Bush's economic policies, while complicating the task of Federal Reserve officials who meet Tuesday to set interest rate policy.

"We have slowed down dramatically," said Stuart G. Hoffman, chief economist for PNC Financial Services Group.

The job figures reflect employers' hesitance to add to their payrolls in July after economic growth slowed sharply in the spring -- to its weakest pace in more than a year -- dragged down by higher oil prices, rising interest rates and weak consumer spending, analysts said.

Until recently, many economists -- including those at the Fed -- thought the spring softness would turn out to be a blip and growth would pick up in the second half of the year. But those forecasts assumed that oil prices would continue falling from the highs reached in May. Instead, oil prices have hit new highs in recent days. Although analysts generally do not see the economy slipping back into recession, several have lowered their expectations for the second half of the year, saying the pace of growth is likely to depend in large part on what happens to oil prices.

"If oil stays here [around $44 a barrel] or goes higher, I have fears . . . about the economy growing," Hoffman said. "If it comes down, I think we will be okay."

"For now, we are willing to give the Fed the benefit of the doubt and accept their view that economic growth and employment will rebound later this summer," Joseph Abate of Lehman Brothers Inc. wrote in an analysis for clients. "But we are getting nervous."

The department's revisions sliced 61,000 jobs off the earlier totals for May and June. That means the economy added an average of 106,000 jobs a month since May -- well below the 150,000 monthly pace analysts say is needed to keep up with population growth.

Many executives who make hiring and spending decisions may have pulled back in recent months because of the uncertainty created by recurrent terror threats, Mideast turmoil and the upcoming election, said Richard Yamarone, director of economic research at Argus Research Corp. He said the economy is still recovering as much from the Sept. 11, 2001, terrorist attacks as from the recession that year.

"Some of these fears will dissipate after the election. But we're going to have these fears no matter who is in office," Yamarone said.

Democratic presidential candidate Sen. John F. Kerry (Mass.), shown visiting a Missouri family yesterday, used the job numbers as a chance to say his administration "could make it better." (Laura Rauch -- AP)

The Bush administration has been cautious in recent months about making claims about the job market, warning that the monthly employment figures bounce around and urging people to focus on the longer-term improvements.

The unemployment rate dropped to 5.5 percent last month from 6.2 percent a year ago, while employers have added jobs for 11 months in a row, for a gain of 1.5 million jobs since August 2003. The total, however, remains 1.2 million below the peak in March 2001, at the beginning of the recession.

"I say we have a strong economy and it's getting stronger," Bush said while campaigning in New Hampshire.

Democratic presidential candidate Sen. John F. Kerry (Mass.) said in a written statement: "The president keeps saying we've turned the corner. But unfortunately, today's job numbers further demonstrate that our economy may be making a U-turn instead. . . . We can make it better."

The weak employment statistics were reported as Federal Reserve officials prepare for their Tuesday meeting on interest rate policy. Many analysts, as well as most traders in futures contracts tied to the rate, expect the Fed to lift its benchmark overnight interest rate to 1.50 percent from 1.25 percent as part of their plan to raise it gradually over many months to prevent inflation pressures from building.

Fed Chairman Alan Greenspan said last month that the economy had hit a "soft patch" that likely would pass as expansion continued. He emphasized that Fed officials see more danger in leaving the rate extraordinarily low, where it would likely spur inflation over time, than they do in the possibility that raising it might dampen growth.

That was nearly three weeks ago, however, before the release of the July jobs report and others showing that consumer spending plunged in June at the steepest rate since September 2001, and that inflation has stabilized in recent months. For months, Fed officials have emphasized that they need flexibility in responding to a changing economy and have said repeatedly that they would alter their planned course of rate increases in response to the data.

At the same time, they have worked hard -- and effectively -- to warn financial markets of any shifts in their policy. Absent any such public warnings, analysts said yesterday that they doubted the Fed would surprise the markets Tuesday by leaving the target unchanged.

Instead, in the statement that will be issued after the meeting, Fed officials can alter the language to acknowledge the "soft patch" and say whether they still believe it is likely to prove short-lived. The wording can signal whether the officials think they might leave rates unchanged at their September meeting, the last one scheduled before the election.

The weakness in the July labor market was broad-based, the report showed, with more industries losing jobs than adding them. Retail, financial services, and leisure and hospitality were among the industries with declining payrolls. Those losses were offset by gains among employers in manufacturing, education, health and business services.

The good news for workers was that average hourly earnings rose by 5 cents, to $15.70, last month, while average weekly earnings grew by $3.25, to $529.09.

The average private workweek lengthened to 33.7 hours in July, a gain of six minutes compared with June, but below the May level of 33.8 hours.

Unemployment among blacks jumped to 10.9 percent last month from 10.1 percent in June. That was more than double the rate for whites, which dipped to 4.8 percent in July from 5 percent the month before.

The jobless rate for people of Hispanic or Latino ethnicity edged up to 6.8 percent last month from 6.7 percent the month before.



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