Job Growth Puts Pressure on Fed To Steady Rates

LAST month the Will-Burt Company in Orrville, Ohio, hired 25 temporary workers to help with maintenance and to produce parts for security equipment.

As it turns out, Will-Burt, which produces a wide variety of products, was not alone. In February the unemployment rate dropped to 5.5 percent, down from 5.8 percent in January.

When Federal Reserve policymakers meet today such hiring is likely to be one main topic of discussion. Fed governors and Fed regional bank presidents will likely talk about whether the hiring is a sign of renewed strength in the economy or just a statistical blip following a snowy winter.

If the Fed decides the economy is still growing at too subdued a pace, it might reduce short-term interest rates by another 1/4 of a percent. However, if the Fed decides to be cautious, it may wait until its next meeting in May.

Many economists have decided the Federal Open Market Committee is going to sit back.

''The Fed members should do their fair share for deficit reduction: cancel the meeting, save the air fares, hotels and restaurants, and just fax in their 'no change' vote, because that is what it is going to be,'' says Paul Kasriel, an economist at Northern Trust Company in Chicago.

The stock and bond markets have already anticipated that the Fed will not act. Short-term interest rates have moved higher compared with late January when there was talk that the economy might be in a recession. Even the interest on fixed-rate home mortgages has ticked up slightly. Yet sales of existing homes picked up in February from January. At the same time, the Dow Jones industrial average, although volatile, is little changed from early February.

''What has changed is the psychology,'' says Brian Fabbri, an economist with Paribas Capital Markets in New York. ''The Fed cannot ignore what's going on; they don't want to upset the market unduly.''

Economists consider the employment numbers important because they represent a significant portion of the equation used to predict economic growth. When forecasters add in productivity gains, they get a fairly accurate picture of how fast the economy is growing - generally considered about 2 percent at an annual rate right now.

This spring, however, many economists are questioning whether the February employment numbers are a good gauge. ''They are statistical science fiction,'' maintains Bruce Steinberg, an economist at Merrill Lynch & Co. in New York.

Strong job growth in February

Mr. Steinberg notes that February has shown the strongest job growth in four of the last seven years. He says one reason is that companies are shifting their work force from a slack Christmas period to stronger winter production. Heavy snowfalls in January also caused companies to lose production and then catch up in February. And there was some bounce back from the government shutdown in January. The combination of these events, Steinberg says, makes it difficult for economists to seasonally adjust the economic data.

In the case of Will-Burt, the new hiring was the direct result of a new contract for security equipment that required it to clean up an old factory it had moved out of recently. To find the workers who may eventually become permanent employees, it went through a search firm. The effort was a little bit easier because of recent layoffs at a truck-manufacturing company and Rubbermaid Inc.

''Unemployment has gone up in this region because of changes by these two companies,'' says Dennis Donahue, the president of Will-Burt.

Even though the Federal Reserve has a sophisticated staff that can dig beneath the numbers, economists expect the Fed will remain cautious. ''Alan Greenspan could worry that there is something beyond the surface veneer that is valid,'' says Phillip Braverman, chief economist for DKB Securities in New York.

The unemployment numbers for March will not be much help either, since they will be skewered by the General Motors strike. Last week, the Labor Department said GM layoffs of 175,000 workers had puffed up new jobless claims.

April figures awaited

Instead, forecasters will be looking at the April employment data, which won't be released until early May. ''We expect employment will be growing at around 150,000 jobs per month,'' says Gordon Richards, chief economist at the National Association of Manufacturers in Washington. ''One hopes the Fed feels comfortable with that rate,'' he adds.

Mr. Kasriel figures US exporters may start to benefit from better economies in Germany and Japan. ''It's clear that the Japanese economy is out of recession and this will help our exports later in the year,'' he predicts.

Although the economy may get some benefit from better markets overseas, economists still expect the Fed to ease interest rates again in the months ahead. Steinberg expects at least two more reductions, totalling about 1/2 of a percentage point. ''By then they [Fed policymakers] will have time to look at more information,'' he explains.

You've read  of  free articles. Subscribe to continue.
QR Code to Job Growth Puts Pressure on Fed To Steady Rates
Read this article in
https://www.csmonitor.com/1996/0326/26012.html
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe