U.S. Economy Down, Not Out
Overall Health Is Seen In Face of Deceleration;
Job Gains Lift Optimism
By KELLY EVANS
October 6, 2007; Wall Street Journal
Employers added 110,000 jobs last month and a previously reported jobs decline in
August was revised away, cheering markets. But the details of the government data
bolstered predictions that the economy is downshifting to a slower speed.
"It's a healthy report, well above expectations," said Bruce Kasman, chief J.P. Morgan
economist.
• The Good News: Job gains last month and a revision of a previously reported jobs
decline in August dispelled fears of a recession.
• The Bad News: But jobs-data details bolstered the view that economic growth is
slowing amid a housing slump and credit-market turmoil.
• Looking to the Fed: The report was deemed to make it less likely that the Federal
Reserve will cut its short-term interest-rate target later this month.
The stock market agreed, pushing the Dow Jones Industrial Average to 14066.01 and the
S&P 500 to a new record
Markets concluded that the report diminishes the likelihood that the Federal Reserve will
cut its target for short-term interest rates at its meeting at the end of October.
But details of the report reinforced the view that U.S. economic growth is slowing as the
deteriorating housing market and credit-market turmoil take a toll. The unemployment
rate rose by one-tenth of a percentage point to 4.7%, its highest in a year, driven by a
substantial increase in the size of the labor force that overwhelmed job growth.
"Employment: Not vigorous, but not recessionary either" was the headline of a client note
by Michael Moran, chief economist at Daiwa Securities America Inc.
Jobs losses were highest in manufacturing and residential construction in September,
temporary jobs fell for the seventh month in a row, and the pace of job creation outside of
government slowed.
"The private sector [jobs] are really the underlying driver of the economy," said Nigel
Gault, chief U.S. economist at Global Insight.
An average of 74,000 jobs per month were created in the private sector in the third
quarter, Mr. Gault said. During the same three months a year ago, the average was
166,000.
With the latest data, forecasters at Macroeconomic Advisers, a St. Louis firm, estimate
that the economy grew at an annual rate of 3.1% in the third quarter, down from the
second quarter's 3.8%.
The employment report is among the most closely watched of the government's economic
indicators.
"The real reason we focus so much on the employment report at this point is because job
growth is the main factor helping to underpin income growth," said David Greenlaw,
chief U.S. fixed-income economist at Morgan Stanley.
He said that as the declining housing market creates a negative "wealth effect" on
consumers, wage growth is one of the few remaining sources driving consumer spending,
the engine of economic growth.
The Labor Department also said employers added 89,000 jobs in August, erasing its
previous estimate of a 4,000-job decline. It also said employers added 93,000 jobs in
July, up from the previously reported 68,000.
The unanticipated decline in payrolls in August that was reported last month contributed
to the Fed's decision to cut interest rates by half a percentage point at their September
meeting. "If the Fed had this data instead of the original August data, would they have
still gone [half a point]? We'll never know," said Mr. Greenlaw, "but that's the talk
floating around trading rooms."
Much of the revision was caused by recalibrating seasonal fluctuations in government
employment, including teaching.
REAL TIME ECONOMICS
"The revision is all about the government [employment] numbers," Mr. Gault said.
"Basically the government is telling us the statisticians got it wrong the first time and
now they fixed it, but that doesn't tell us that much about the underlying health of the
economy."
In a speech in Philadelphia, Fed Vice Chairman Donald Kohn said, "Once we get through
the near-term weakness caused by the extra downleg from the housing contraction and
any spillover from tighter credit conditions, I am looking for moderate growth with high
levels of employment."
But Mr. Kohn cautioned, "You should view these forecasts even more skeptically than
usual....We do not know how financial markets will evolve, and we do not know how
households and businesses will respond to financial developments."
Mr. Kohn, acknowledging that many observers had expected a quarter-point rate cut in
September, defended the bigger move as "not an unreasonable first approximation of
what might be required to keep the economy on a sustainable growth path" in the face of
uncertainty about how quickly markets would recover.
"I thought," he added, "that economic performance would be better served by the Federal
Reserve taking its chances on responding too much, or too rapidly, to the turmoil in
financial markets rather than acting too little, or too slowly."
The Labor Department said average hourly
earnings rose by 7 cents last month, a gain of 4.1%
since last September, a bullish sign for consumer
spending but a worrisome one for those
preoccupied with the risk that inflation is
accelerating.
In a separate report, the Fed said consumer
borrowing grew 6% in August from a year earlier,
the fastest in three months. Consumer credit
outstanding increased by $12.2 billion in August to
$2.47 trillion, after climbing by $9.6 billion in
July.
Non-revolving credit, such as car and boat loans,
grew by $6 billion to $1.55 trillion. Revolving credit, which mainly reflects credit-card
financing, grew $6.1 billion in August to $915.5 billion.
Even before the Fed's rate cut, the average rate on new-car loans from auto-finance
companies fell to 4.15% in August from 4.74%. The average maturity on new car loans
grew to 62.6 months, more than five years, from 58.6 months in July.
Write to Kelly Evans at kelly.evans@wsj.com