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Jobs on the mend? Not yet
The surprising drop in weekly jobless claims is good news, but the labor market's far from fixed.
July 24, 2003: 3:33 PM EDT
By Mark Gongloff, CNN/Money Staff Writer

NEW YORK (CNN/Money) - The unexpectedly sharp drop in new jobless claims is good news but the decline should be taken with a grain of salt.

It could be weeks before jobless claims numbers are reliable again, and several months or longer before jobs become plentiful, economists said.

The number of new claims for jobless benefits tumbled to 386,000 last week, the Labor Department said Thursday, the lowest level since Feb. 8 -- which was the last time the number was below 400,000, the standard for labor-market weakness.

So is the labor market on the mend? Not quite yet.

For one thing, summer factory shut-downs -- including automobile plants, which "retool" every year to get ready to make next year's line-up of cars -- mean thousands of workers, who don't get vacation pay for the shutdowns, flood their unemployment offices, playing havoc with the Labor Department's seasonal adjustments to its weekly numbers.

A few weeks ago, claims jumped to their highest level in 20 years. Last week, they plunged to their lowest level in five months. Something fishy's going on -- and the numbers will likely continue to be suspect until the middle of August.

"It is impossible to tell how much of the drop simply reflects the inability of the seasonal adjustment to cope with the end of the auto retooling shutdowns, and how much is due to the underlying trend," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

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"The retooling effect will not wash completely through the claims numbers for another couple of weeks."

For all anybody knows, the number of claims could jump back above 400,000 again this week, Shepherdson said.

Certainly, many economists combing through the statistical gobbledygook saw some real signs of strength. The four-week average of claims, which irons out ups and down in the weekly numbers, edged lower, a good sign though it remained at a high level.

And the number of people drawing benefits for two weeks or more fell in the week ended July 12, the latest data available.

"We can't ignore the trend -- jobless claims have been coming down," said Anthony Chan, chief economist at Banc One Investment Advisors. "We're at least close to turning the corner on the labor market front."

But what does "turning the corner" mean? Many economists fear it simply means an end to layoffs -- actual job growth could still be several months away.

Two Federal Reserve officials -- Ben Bernanke, a Fed Governor and voting member of the Fed's monetary policy committee, and Robert McTeer, President of the Dallas Fed -- said this week that the U.S. economy could grow at a robust pace the rest of this year and next year and yet spur little job growth.

Bernanke said gross domestic product (GDP), the broadest measure of the nation's economy, could grow at a 4 percent rate in 2004 -- compared with the anemic 1.4 percent pace in the first quarter of 2003 -- and the unemployment rate would only fall to 6 percent, from 6.4 percent in June.

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In other words, the current "jobless recovery" -- the longest since World War II -- seems likely to continue for some time, raising the chances that the Fed may have to cut its key short-term interest rate again, even if GDP growth recovers, as many expect it will.

"The labor market remains the Achilles heel of a robust economic recovery," said Oscar Gonzalez, economist at John Hancock Financial Services. "With the Fed talking about lowering interest rates to zero to get the economy growing strongly again, getting people back to work and increasing demand may be the Fed's primary worry."  Top of page

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