Caution: Sluggish job growth ahead

NEW YORK (CNNMoney.com) -- Economists aren't worried about job losses any longer, but sluggish growth looks like it's here to stay.

This week has seen some signs of economic strength, from a much stronger than expected report on economic growth in the third quarter to a rebound in construction spending. The Federal Reserve even seemed to give the economy a passing grade while cutting its key interest rate Wednesday, as it described economic growth as "solid."

But when the Labor Department is due to report on October job growth at 8:30 a.m. ET Friday, economists are looking for another month of sluggish job growth. Those surveyed by Briefing.com forecast employers added only 80,000 jobs in October, and they are looking for the unemployment rate to stay at the 4.7 percent level hit in September.

And many economists say they're not expecting particularly strong job readings the rest of this year and going forward into early next year. Economists generally believe that employers need to add between 125,000 and 150,000 jobs a month just to keep up with the growth in the labor force, so prolonged job growth at the levels forecast for October are seen as leading to higher unemployment in the coming months.

"We're looking at job growth below 100,000 on an average going forward, and we're looking for unemployment to get up to 5.2 percent by the third quarter of next year," said Jay Bryson, global economist with Wachovia.

All these forecasts are better than the initial Labor Department reading for August, which was that the number of Americans with jobs had fallen by 4,000, the first decline in four years. That decline helped open the way for the Fed to cut rates by a half-percentage point at its September meeting due to concerns about a slowing economy.

But a month ago, the Labor Department reported not only a 110,000 gain in U.S. payrolls in September, but it revised away a 4,000 job loss originally reported in August, raising that estimate to a gain of 89,000. And when the Fed again cut rates Wednesday, this time by a more modest quarter-percentage point, its statement suggested that the further rate cuts are not necessary, unless there's a worsening of the current economic conditions.

So another weak jobs number Friday could depress stock indexes, rather than lifting investors' hopes for another rate cut. And a much weaker-than-expected payroll number will likely prompt a stock sell-off on worries about how weaker labor markets will depress consumer spending. In the past, bad news was good news - and stocks sometimes rose on signs of sluggish job growth because those readings raised hopes of rate cuts.

"I think bad news is bad news going forward," said Bryson.

Still Bryson and other economist say they don't see the bottom falling out of labor markets, even with more sluggish economic growth ahead.

Job losses are likely to stay limited to construction and the financial sector, as well as sectors of manufacturing, which have been seeing long-term declines due to import competition, such as automakers and textile. For example, Chrysler announced plans Thursday to cut up to 12,000 jobs as it cuts production plans to bring its capacity more in line with lower demand for its products.

But other sectors of manufacturing are not fairing as badly, due partly to a pickup in exports, helped by a decline in the value of the dollar that makes U.S. goods more competitive overseas and imports more expensive here. The Institute of Supply Management survey of manufacturing executives released Thursday showed a slight pickup in hiring plans in the overall sector, coupled with a solid gain in export orders.

The monthly employment report from payroll servicing firm ADP released Wednesday estimated that private-sector employers overall added 106,000 jobs in October, which is more than twice the average gain of 43,000 jobs over the firm's three previous monthly reports. That gain came even with manufacturers cutting 14,000 jobs and construction reducing employment by 16,000.

"Employment at small and medium-size firms is very robust," said Joel Prakken, chairman of Macroeconomic Advisers, which compiles the ADP report. "It's the large firms in construction, manufacturing and finance that have been shedding jobs. But two months after the August financial seizure, there's no evidence that weakness is spilling out of the housing sector."

Still job growth could slow further going forward if commodity prices, particularly oil, remain high.

"The higher oil prices are going to affect consumption, they're going to affect business investment. That means they're not going to hire more people, even if they're not laying off," said Jeoff Hall, the chief U.S. economist for Thomson Financial.

Hall said that while the direct impact of $95 a barrel oil on hiring is difficult to estimate, he has no doubt it's a negative for the labor market.

"I think we'll see employment growth in the 50,000-a-month range in the first half of '08 if we have oil at $95," he said.