Sunday, April 27, 2008

Payrolls Probably Shrank, Growth Slowed: U.S. Economy Preview

By Courtney Schlisserman

April 27 (Bloomberg) -- The U.S. probably lost jobs for a fourth month as the collapse in construction and a slowdown in consumer spending almost stalled growth, economists said before reports this week.

Payrolls fell by 78,000 in April, based on the median forecast in a Bloomberg News survey before the Labor Department's May 2 report. Figures two days earlier may show the economy expanded at a 0.4 percent annual pace from January through March, the smallest gain in five years.

``Despite our forecast for positive growth in the first quarter, we believe the economy has formally slipped into a recession,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``Given the headwinds from the housing and credit markets, we expect spending to remain weak through the end of 2009.'' Harris projects a 0.7 percent growth rate for the first three months of the year.

Economists forecast spending rose last quarter at the slowest pace in 13 years as the loss of jobs, increase in food and energy costs, and drop in property values hurt confidence. The Federal Reserve may lower the benchmark interest rate by a quarter-point to try to stem further erosion in the growth.

The Labor Department's employment report may also show the jobless rate rose to 5.2 percent this month, the highest level in three years.

Factory payrolls fell by 35,000, according to the survey median. Construction firms, retailers and financial-service businesses may also have cut jobs.

Job Losses

Wall Street banks and securities firms, hit by $309 billion in mortgage losses and writedowns, have slashed 48,000 jobs in the past 10 months, led by cuts at Citigroup Inc., Merrill Lynch & Co., Lehman Brothers and Bank of America Corp, according to the Securities Industry and Financial Markets Association.

Merrill Lynch, the third-biggest U.S. securities firm, said April 17 it would cut about 3,000 more jobs after the credit- market crisis forced it to write down about $6.5 billion in debt.

``The employment report will clearly show the economy is in recession,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. While a positive reading on first-quarter growth will stoke debate, ``ultimately, what will determine whether we're in a recession or not is payrolls,'' O'Sullivan said.

A build-up in inventories as demand slowed and record exports helped to keep gross domestic product growing. While foreign demand will probably continue to be strong, the increase in stockpiles may mean companies will slow production and spending in coming months, hurting growth.

Contraction Ahead

Merrill Lynch economists last week forecast the economy would shrink at a 2.3 percent annual pace from April through June as consumer spending continues to slow, forcing companies to slash inventories.

``Contrary to popular opinion, the incoming data are, on net, getting worse, not better,'' Merrill's Chief North American Economist David Rosenberg said in an April 24 note to clients.

Fed policy makers are scheduled to meet on April 29-30 to discuss the economy and interest rates. So far this year, central bankers have cut the overnight lending rate between banks by 2 percentage points to 2.25 percent.

``The economy's gone soft, we know that, and the Fed is easing,'' said Kevin Logan, a senior market economist at Dresdner Kleinwort in New York.

Investors have been increasing bets in recent weeks that policy makers will pause after this week's cut, according to Bloomberg data, as concerns over inflation mount.

Spending Slowdown

Consumer spending in the first quarter probably rose at a 0.7 percent annual pace, the smallest gain since the first three months of 1995, according to the median forecast. The Commerce Department's estimate is due April 30 as part of its GDP report.

Manufacturing has also cooled as spending slowed. The Institute for Supply Management's factory index, due May 1, fell to 48 this month from 48.6 in March, the survey showed. A reading of 50 is the dividing line between expansion and contraction.

While down, manufacturing has so far performed better during this slowdown than in previous contractions as demand from overseas continues to grow. In February 2001, a month before the last recession, the institute's index was 42.1.

Other reports this week are forecast to show home prices continued to fall, consumer confidence sank, income gains slowed and spending on construction projects dropped.

Bloomberg Survey

Release Period Prior Median
Indicator Date Value Forecast
Case Shiller Monthly YO 4/29 Feb. -10.7% -12.0%
Consumer Conf Index 4/29 April 64.5 61.5
GDP Annual QOQ% 4/30 1Q A 0.6% 0.4%
Personal Consump. QOQ% 4/30 1Q A 2.3% 0.7%
GDP Prices QOQ% 4/30 1Q A 2.4% 3.0%
Core PCE Prices QOQ% 4/30 1Q A 2.5% 2.1%
Employ Costs QOQ% 4/30 1Q 0.8% 0.8%
Chicago PM Index 4/30 April 48.2 47.5
Pers Inc MOM% 5/1 March 0.5% 0.4%
Pers Spend MOM% 5/1 March 0.1% 0.2%
Initial Claims ,000's 5/1 27-Apr 342 363
Cont. Claims ,000's 5/1 20-Apr 2934 2950
ISM Manu Index 5/1 April 48.6 48.0
Construct Spending MOM% 5/1 March -0.3% -0.7%
Nonfarm Payrolls ,000's 5/2 April -80 -78
Unemploy Rate % 5/2 April 5.1% 5.2%
Manu Payrolls ,000's 5/2 April -48 -35
Factory Orders MOM% 5/2 Jan. -1.3% 0.2%

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