NEW YORK (CNN/Money) -
The 8.4 million unemployed Americans who are hoping for good news about the labor market probably have to wait a little longer -- all this week's news about the labor market, at least, is going to be bad.
Though many analysts think an economic recovery could be just months away, a really bad U.S. unemployment report Friday -- following dismal reports this week from the nation's purchasing managers showing weakness in both manufacturing and service sectors -- could finally inspire the Federal Reserve to cut interest rates again, maybe even before their next policy meeting, scheduled for May 6.
"While [Fed policy-makers] have suggested a need to see weak post-war data before being convinced of any need to cut ... it is entirely possible that the recent pre-war data have been sufficiently shocking ... to make a majority of them keen to move before the next meeting," said Rory Robertson, interest rate strategist at Macquarie Equities' U.S. office.
The Labor Department reported Thursday that weekly claims for unemployment benefits jumped last week to their highest level in a year. The department is scheduled Friday to report on the jobless rate and U.S. payrolls for all of March, and that report's not going to be very pretty either, most economists say.
"Unfortunately, I don't think the news tomorrow morning will put smiles on any faces," said Carl Tannenbaum, chief economist at LaSalle Bank/ABN Amro in Chicago.
Economists surveyed by Reuters expect the unemployment rate to rise to 5.9 percent from 5.8 percent in February, and think employers cut 29,000 jobs outside the farm sector, after cutting a whopping 308,000 jobs in February.
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Those numbers might end up looking even worse, some analysts said, thanks to the difficulties of accounting for members of the reserves who got called up and the effect of the late Easter holiday on the Labor Department's seasonal adjustments to the numbers.
"There are several large drags, in a statistical sense," said Steven Wieting, senior economist at Wall Street's most pessimistic firm, Salomon Smith Barney, which expects 175,000 job cuts and an unemployment rate of 6 percent. "The underlying condition is that we're probably losing jobs. But the February and March data are not indicative of how bad it really is."
Wieting and most other economists doubt there will be repeat of 2001, when private employers cut nearly 2 million jobs from payrolls after the recession that started in March of that year, and the Sept. 11 attacks.
Especially if the U.S.-led war with Iraq goes well, the hope is that a fog of uncertainty will lift and businesses will start to spend and hire again, since they've already cut their work forces and inventories practically to the bone in a bid to stay profitable.
And falling oil prices could boost consumer confidence and ease some of the profit pressure companies have been under.
"Consumer confidence follows oil prices quite significantly," said David Resler, chief economist at Nomura Securities International. "The drop in oil prices [since the start of the war] has had a quick and immediate impact on people's attitudes."
But some economists cite the lingering effects of the bursting of the 1990s investment bubble -- factories are operating at a mere three-quarters of capacity, and some corporate and household balance sheets are still a mess -- and say businesses will take their time before hiring again, no matter how the war goes.
"Maybe by the second quarter of next year, we'll be looking at some lower unemployment rate -- say in the 5 to 5.5 percent range, if we're lucky," said Jared Bernstein, labor economist at the Economic Policy Institute, a Washington think tank. "But that would be the best to hope for, and it's based on our working through these excesses that persist."
Policy-makers at the Fed have been more or less neutral on this argument, saying the war has made diagnosing the economy's problems temporarily impossible.
At their last meeting, Fed policy-makers decided to sit on their hands and left the Fed's key short-term interest rate unchanged at a 40-year low. Nor would they even speculate if the economy was tilted toward weakness or a rebound, an unusual move by the nation's central bankers.
If Friday's unemployment report is really bad, the Fed might be forced to ignore the debate about whether the weakness is just war-related or more deep-seated. The central bankers may start to worry that job cuts will have a snowball effect, undercutting consumer spending, which fuels two-thirds of the total economy.
"The Fed doesn't want a downward multiplier to get too firmly established when we're on the edge of deflation," said Bill Cheney, chief economist at John Hancock Financial Services in Boston.
"So I think the Fed might be willing to take out some insurance merely because the data themselves pose a risk, rather than because the data prove we're heading into a new recession. In that sense, it's quite an important number tomorrow."
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