US jobless figures are a nasty surprise

Employers continued to shed workers in August, the US government reported Friday, while at the same time, the US' unemployment rate ticked slightly lower.

In its monthly employment survey, which it said was probably not affected by the Aug. 14 blackout in the Northeast, the US Department of Labor said that non-farm payroll employment fell by 93,000 last month. It was the seventh consecutive monthly decline in employment, and the biggest since March.

Meanwhile, the nation's unemployment rate dipped to 6.1 percent, from 6.2 percent in July.

The job loss numbers were a surprise and a disappointment to many private economists, who had been expecting that payroll employment would be unchanged or perhaps slightly higher. Compounding the concern is the fact that other indicators suggest the economy is growing vigorously in the current quarter.

Reaction in the financial markets was muted. In early trading, stock prices, which have been rising vigorously for much of this holiday-shortened week, were mixed. Bond prices moved up a bit, and interest rates declined slightly.

The fact that rising demand is not prodding employers to add workers suggests that the economy may need to expand at a much more rapid rate than previously thought in order to generate job growth.

"This is a major disappoint-ment," William Sullivan, a senior economist at Morgan Stanley, told viewers on CNBC shortly after the numbers were released. "It confirms my thesis that there are structural shifts in the labor market that could impede new hiring."

Among other things, Sullivan cited surging productivity growth, big investments by businesses abroad and the spread of labor-saving technology as part of the shift that is allowing the economy to produce more with fewer workers.

"If productivity can grow at 3.5 percent to 4 percent indefinitely, and it is growing faster than that now, it will be very difficult to generate job growth," said David Resler, chief economist at Nomura Securities International. "It may be a very long time before we begin reaping the rewards of an uptick in final demand in terms of rising payrolls."

If Resler's observation is borne out, it could present a major political problem for US President George W. Bush, who faces re-election 15 months from now.

"The Democrats have an issue," said Joe Liro, an economist at Stone & McCarthy Research Associates, an economic consulting firm based in Princeton, New Jersey.

The White House played down the loss of jobs Friday.

"What usually happens after a recession is jobs are one of the last things to catch up," said White House spokesman Scott McClellan.

"There are a number of positive signs in our economy," he said. "But there is more we need to do to get the economy growing even faster. The president is not satisfied."

Earlier this week, Bush announced that a post at the US Department of Commerce was being changed to focus on revitalizing the manufacturing sector.

Manufacturing payrolls were among those that fell again last month, according to the employment data. Factory owners, who have been cutting jobs for more than three years, shed an additional 44,000 positions last month.

Job cuts were also seen in the service and government sectors. Service sector employment fell by 67,000, while government shed 26,000 workers.

Those declines were not offset by gains in health care, which added 25,000 workers, and in construction employment, which rose by 19,000.

Last month, nearly 2 million Americans had been unemployed for 27 weeks or more, representing nearly 22 percent of all jobless workers. Those numbers were similar to July's.

Many economists and participants in financial markets had been encouraged by recent economic data, which showed that consumers had been spending at a rapid rate in the current quarter.

But a number of analysts said they were concerned by the income and hours-worked data in Friday's report. Average hourly earnings rose a miniscule 0.1 percent last month, and the average hourly workweek was unchanged at 33.6.

"The majority of economists are focusing on relentless spending data," said David Rosenberg, chief North American economist at Merrill Lynch. "Personal spending is strong, there is no doubt about it."

"But that is because of the mortgage refinancing boom and the tax cuts," he said. "Spending is strong, but production and incomes are weak. Once the steroids from home refinancing wave and the tax cuts wear off, the economy is likely to slow down."

Rosenberg estimated that on an annualized basis the economy received US$300 billion worth of stimulus from the tax cuts and the extra money left in homeowners' pockets by lower mortgage rates.

Rising productivity is very good news for corporate profits, which are rising. Capital spending is improving, and eventually that may lead to increased hiring.

Liro, who is forecasting growth of anywhere from 3 to 5 percent over the next five or six quarters, said he expected hiring to increase in the fourth quarter. But the structural changes Sullivan described are real, he said, and will limit the rise in employment.

"There will be some job growth in the fourth quarter," Liro said, "but it won't be booming."