Jobs fall raises US recession fears

PAUL WALLACE

An unexpected sharp fall in employment in January raised fears that the US economy is slipping into recession. As a result, economists expect further cuts in interest rates following this week's quarter point reduction by the US Federal Reserve to 5.25 per cent.

Non-farm payrolls, which had been expected to rise by about 50,000, instead dropped by 201,000. With the exception of April last year, this was the first fall in payrolls for three years and the largest since April 1991.

The unemployment rate also rose sharply from 5.6 to 5.8 per cent, the highest since April.

Robert Reich, Labor Secretary, said that the blizzards had obscured the view of the economy. But economists said that the fall was too big to be ascribed simply to severe weather. It struck alarm bells about a fast- weakening economy.

Speaking at the World Economic Forum in Davos, Lawrence Summers, US Deputy Treasury Secretary, said that the crucial priority for 1996 was "maintaining growth and putting in place any measures to counteract downside growth".

The significance of the jobs figure is that it provides an up-to-date indicator of the overall level of economic activity. Growth in jobs of about 100,000 a month equates to an approximately 2 per cent increase in real gross domestic product a year. In 1994, when the economy was expanding strongly, monthly jobs growth ran at almost 300,000.

Another good proxy for real GDP growth is the index of hours worked. This fell sharply in January from 132.9 to 131.3, a further indicator of a flagging economy.

Donald Straszheim, chief economist at Merrill Lynch, said while the figures were affected by the severe weather, they were further evidence "the US economy is going to be pretty weak in the first half of 1995 - a slowdown, but not a stop".

The main reason for the deceleration was a continuing attempt by manufacturers to run down excess inventories built up last year. However, Mr Straszheim said a recession would be avoided thanks to the easing in monetary policy started by the Fed last July. He expected the key Fed Funds rate to fall to 4.5 per cent by the middle of the year.

Three-month Eurodollar contracts reacted positively to the employment report. They are pricing in two further quarter point reductions in the Fed Funds rate by June. But the reaction of bond dealers was more muted.

They were struck by the sharp rise of 0.5 per cent in hourly earnings, which took the year-on-year rate to 3.3 per cent. Combined with the rise in the gold price, this raised concern that attempts to prop up the economy might rekindle inflation.

The setback on the employment front came hard after other developments signalling red for a slowing economy. Consumer confidence fell by 12 points to 87. The US purchasing managers' index of the health of manufacturing dropped from 46 to 44.2. Retail sales also grew by considerably less than had been expected.