Friday, May 7, 2004

Robust employment growth has returned to the U.S. economy, with 625,000 jobs created in the past two months and 867,000 since the beginning of the year.

The report from the Labor Department yesterday heralded the end of the jobless recovery of the past two years. It showed job creation grew steadily from a trickle in August into an economywide gusher in March and April, while the unemployment rate dropped from 6.1 percent to 5.6 percent.

In a highlight of the blockbuster report, the hard-hit manufacturing sector, with more than 2 million job losses since July 2000, created 37,000 jobs in the past three months — the first new factory jobs in four years. But nearly every profession recently has joined in the job bonanza.

Financial markets reacted sharply to the news, which was seen as the evidence of well-entrenched job growth that the Federal Reserve wanted to see before raising interest rates.

The unexpectedly strong job gains prompted markets to brace for a rate increase as early as next month. Stocks slumped, while the dollar and market interest rates surged.

The jobs report marked a turning point politically as well as economically, because Democrats have exploited discontent over the long job drought. While the job deficit since President Bush took office is still high, at 1.5 million, at the current rate of job creation, it could be wiped out by the November election.

Mr. Bush rejoiced at a campaign stop in Iowa, attributing the breakthrough to the “entrepreneurial spirit” of businesses, which he says his tax cuts helped to unleash.

“Since last August we’ve added 1.1 million jobs. People are finding work in this country,” he said. “The tax relief we passed is working.”

Sen. John Kerry of Massachusetts, the presumptive Democratic presidential nominee, acknowledged the “good news” on jobs, but said more than 8 million people remain unemployed and other problems persist. He noted that the price of oil hit nearly $40 a barrel yesterday, a 14-year high, in New York trading.

“We still have a long way to go,” he said, decrying the “squeeze on the middle class” during the Bush years.

Economists said the job news opens up a new chapter in the economic recovery.

“It confirms the economic expansion is now self-sustaining,” said Edward Yardeni, chief investment strategist at Prudential Equity Group.

With the expansion now producing hundreds of thousands of jobs and increasing consumers’ incomes each month, it no longer requires extraordinarily low interest rates or tax cuts to keep going — a big change from the past three years, he said.

The report shows that businesses made a critical transition in the first four months of the year. They stopped asking their staffs to work longer hours and produce more, and they instead started hiring new workers. The average workweek was unchanged at 33.7 hours, while manufacturing hours actually dropped during April.

Many businesses are deciding to hire people who had been working for them as temporary employees or contractors, turning their jobs into full-time positions, said Michael D. Alter, president of SurePayroll, a payroll-services firm.

Small businesses in particular are in a hiring mode, he said, as is shown by a revealing switch in the federal tax forms they are using, from “1099” forms used to report payments to contractors to “W-2” forms used to report employee income.

The shift from independent and temporary workers to full-time employees explains why the unemployment rate has not declined much recently despite a big increase in jobs, analysts said.

In the Labor Department’s surveys, people are counted as employed whether they are working for themselves or on a company’s payroll. Thus, the switch to full-time jobs from ad hoc employment does not change the rate of employment or unemployment.

The change can be a critical one for workers and the Fed. The central bank has pointed previously to weak payroll growth in pledging to be “patient” and “measured” in removing the stimulus provided by the lowest interest rates in a generation.

Fed Chairman Alan Greenspan has hinted that the central bank wants to move rates back to a “neutral” level that neither stimulates growth nor curbs it. On Thursday, he warned heavy debt users — from the federal government to consumers — that the “free lunch” of easily available, low-rate credit will not last forever.

Economists said the gangbuster revival seen in the job market now frees the Fed’s hand. And since the job rebound has been accompanied by a robust pickup in prices, they say the Fed may feel a new urgency to its mission of forestalling a broadening out of inflation.

John Silvia, chief economist at Wachovia Securities, said he now expects the Fed to raise rates by three-quarters of a point, in quarter-point increments, by the end of the year.

The Fed will move slowly, however, because “the last thing the Fed wants is to short-circuit the economic recovery during an election year” and provoke the wrath of Congress, he said.

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