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Job Troubles Cast Shadow Over Growth

Sat Aug 7, 2004
By Pedro Nicolaci da Costa

NEW YORK (Reuters) - The future looks increasingly dim for U.S. economic growth as high oil prices, spotty consumer demand and fears of terrorism prevent companies from hiring new workers, analysts said on Friday.

From behind their desks in New York and Washington, analysts and policy-makers had forecast that a June slowdown in consumption was a glitch in an otherwise sound recovery.

But a meager increase in employment for July points to a very different reality, suggesting a slowdown in the world's largest economy is much more pervasive.

"Everyone and their brother was saying the soft patch would soon dissipate and that the economy would soon reaccelerate," said Lakshman Achuthan, managing director at the Economic Cycle Research Institute, an independent research firm in New York.

"This jobs report clearly undermines that theory."

U.S. employers added only 32,000 workers to payrolls in July as consumers, who can no longer rely on extra cash from tax rebates, were already growing reluctant to spend.

The data dealt a serious blow to Federal Reserve Chairman Alan Greenspan's contention the economy had entered a period of self-sustaining expansion that would allow the central bank to gradually raise interest rates to a more balanced level.

Now, not only is the path for rates unclear, but also the economy's ability to maintain healthy growth is in question.

"This is not the kind of robust job growth needed for a sustained, strong expansion of the economy," said Lee Price, research director at the Economic Policy Institute.

Worsening the economic picture, oil prices have soared to record highs over the past few days, casting doubt on another proposition from the Fed -- that energy costs would slowly come down as the year progressed.

During the second quarter, rising prices at the pump were in part responsible for the biggest slowdown in consumer spending in almost three years, hurting economic growth.

U.S. gross domestic product grew 3 percent during that period compared with 4.5 percent in the first quarter.
Lurking in the background, concerns about possible terrorist attacks have made it tough for companies to invest and create jobs amid a stream of often vague alerts from the U.S. Department of Homeland Security.

All this uncertainty has hurt the stock market, which is carving out new lows for the year as doubts about corporate profits reinforce momentum to sell shares.

While few expect this raft of bad news to force the economy back into recession, the situation looks bad enough for previously optimistic economists to start thinking about revising down their forecasts for third quarter growth.

In a recent Reuters poll, economists had forecast a median 4.2 percent annualized pace of growth in the third quarter, but the poor jobs data have thrown all those forecasts into doubt.

Jan Hatzius, senior economist at Goldman Sachs in New York, said, "a lot of people will be cutting third-quarter growth estimates into the threes." He said Goldman was sticking with its forecast for a 3.5 percent pace, but added: "It does assume a pretty strong rebound in the monthly data."

On the bright side, car sales rebounded strongly in July after a sharp decline in June. But even here, analysts noted that much of this rise was fueled by another wave of incentives and selling cars at little or no profit in the short term is hardly a good omen for the economy.






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