Friday, February 1, 2008

U.S. Economy: Payrolls Fall for First Time Since 2003 (Update3)

By Bob Willis

Feb. 1 (Bloomberg) -- The U.S. unexpectedly lost jobs for the first time in more than four years, increasing the odds the economy will fall into a recession and making it likely the Federal Reserve will cut interest rates another half point next month.

Payrolls fell by 17,000 in January after an 82,000 gain in December that was larger than initially reported, the Labor Department said today in Washington. None of the 80 economists surveyed by Bloomberg News predicted a decline.

Employment is one of the indicators, along with wages, production and sales, that help determine the start of economic contractions. The decline poses a further threat to consumer spending, which accounts for 70 percent of the economy, after households were already hurt by falling home and stock values.

``It is highly unusual for payrolls to fall except in a recession,'' Christopher Low, chief economist at FTN Financial in New York, said in an interview. ``The Fed will have to keep cutting rates and we can expect a cut at the next meeting in March.''

Fed Chairman Ben S. Bernanke and his colleagues said Jan. 30 ``risks to growth remain'' after cutting the benchmark rate by a half-point, eight days after an emergency three-quarter- point move. Odds of another half-point cut, to 2.5 percent, in March rose to 70 percent from 68 percent late yesterday, according to April futures quoted on the Chicago Board of Trade.

Treasuries Rally

Treasuries, which fell earlier in the day, rose after the report, with 10-year yields dropping to 3.60 percent at 5:13 p.m. in New York, from as high as 3.66 percent. Stocks rose on Microsoft Corp. $44.6 billion bid for Yahoo! Inc., with the Standard & Poor's 500 Index gaining 1.2 percent, at 1,395.42.

A private report today separately showed that manufacturing unexpectedly grew in January, showing business investment is holding up as other parts of the economy weaken. The Institute for Supply Management's index rose to 50.7, a five-month high, from 48.4 in December, the Tempe, Arizona-based group said.

Manufacturers, state governments and construction companies lost jobs, today's report showed.

``Employment fell across a broad assortment of industries,'' said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina. ``It raises a number of red flags for the economy. There is no question economic growth has slowed to a crawl and the risks of recession are significant. That is why the Fed has cut interest rates so aggressively.''

The jobless rate, which is based on a separate survey from the payrolls figures, declined to 4.9 percent in January from 5 percent the previous month.

Economists' Forecasts

The drop in payrolls in January was the first since August 2003. The median forecast was for a payrolls gain of 70,000, compared with an initially reported increase of 18,000 in December. Forecasts ranged from gains of 5,000 to 160,000.

Revisions for November and December brought total job gains for the two months to 142,000, versus a previously reported 133,000.

``Job growth has slowed quite a bit,'' Keith Hall, head of the Bureau of Labor Statistics, said at the congressional Joint Economic Committee hearing in Washington today. ``It's a little early to talk about this being a real issue yet. We've had pauses like this before.''

Hall added that he ``shouldn't speculate'' about whether the economy is headed into a recession.

Service industries, which include banks, insurance companies, restaurants and retailers, added 34,000 workers last month after an increase of 143,000 jobs in December. Retail payrolls rose 11,200 after a decline of 12,000 in December.

Factory Jobs

Factory payrolls dropped by 28,000 after falling 20,000 a month earlier. Economists had forecast a drop of 20,000 in manufacturing employment. Builders trimmed payrolls by 27,000 in January.

Government payrolls shrank by 18,000 during January, the first decline in six months, after rising 28,000 in December.

``This time it was government jobs that pulled down the total,'' said David Resler, chief U.S. economist at Nomura Securities International Inc. in New York.

The drop was led by a decrease in state education jobs, indicating less employment at schools.

Today's report showed the first decrease in the average work week since July, while hourly wages rose 0.2 percent, less than the 0.3 percent increase economists had forecast. Wages were up 3.7 percent from a year earlier.

The deepest housing recession in a quarter century has dragged down home construction for the past two years, hurting demand for building materials and appliances and prompting firings at construction, mortgage-finance and other housing- related industries.

Home Depot

Home Depot Inc., the world's largest home-improvement retailer, announced yesterday it fired 500 workers at its Atlanta headquarters, or about 10 percent of the staff there, to focus resources on its stores, spokesman Ron DeFeo said.

Yahoo!, the second-largest online search engine, said this week that fourth-quarter profit fell 23 percent and announced plans to cut 1,000 jobs, or 7.1 percent of its workforce.

With today's report, the Labor Department revised the payroll numbers after reviewing more complete tax data not available earlier from state unemployment insurance programs and making adjustments to its estimates of seasonal hiring patterns.

The revision subtracted 376,000 jobs from the previous estimate for the year ended December 2007, bringing total job growth for the period to 1.137 million.

Growth Rate

The economy expanded at a 0.6 percent annualized pace in the fourth quarter, government figures showed this week, and many economists anticipate a contraction in the current period.

``We are in or near a recession,'' David Greenlaw, chief fixed-income economist at Morgan Stanley in New York, said in a Bloomberg Television interview. ``We'll see the jobless rate begin to drift higher over coming months.''

Today's Labor Department figures ran counter to a private report Jan. 30 that suggested hiring rebounded last month. Companies hired 130,000 additional workers in January, according to data compiled by ADP Employer Services. The figures include only private employment and don't take into account hiring by government agencies.

According to the Labor Department report, private employers added 1,000 jobs in January.

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