NEW YORK (CNN/Money) -
Economists expect the April jobs report Friday to show that unemployment increased as tens of thousands of workers were cut from U.S. payrolls. The actual report, when it comes, could make that outlook seem overly optimistic.
Thursday, the ISM and jobless claims numbers were worse than economists expected. Will a trifecta of overoptimism be completed Friday? Analysts have been forecasting that unemployment rose to 5.9 percent last month from 5.8 percent in March, according to the latest Reuters poll, and that employers cut 53,000 jobs in April. But recent reports indicate things could be worse than that.
For one thing, new weekly claims for unemployment benefits last week came in above 400,000 for the 11th straight week -- a level that usually means the labor market is in decline. And the four-week average of claims, a number that irons out weekly ups and downs, swelled to 442,000, the highest in more than a year.
Meanwhile, the nation's purchasing managers, surveyed by the Institute for Supply Management (ISM), said manufacturing activity last month tumbled to its lowest level since October 2001, when the economy was still reeling from the Sept. 11 attacks.
"These numbers give you pause. The ISM and the fact that jobless claims continue to rise suggest there continues to be job loss," said Gerald Cohen, senior economist at Merrill Lynch, which expects 125,000 job losses to be reported Friday.
30,000 jobs not enough
Even many of the more optimistic economists, including those who think payrolls actually grew in April, don't think the slim gains they're expecting are anything to get excited about.
Henry Willmore, chief economist at Barclays Capital, said his firm still expects 30,000 jobs to be added to payrolls in April, due mainly to seasonal factors such as an early Easter and bad weather in February and March.
But 30,000 new jobs, while fantastic for the people who get them, don't come close to the 125,000-to-150,000 new jobs needed each month to keep up with population growth, according to most economists.
"'Stagnant' is a fair characterization of the labor market," Willmore said. "30,000 jobs is hardly something to get too excited about."
Other economists were ratcheting down their forecasts in light of recent data, including Nomura Securities chief economist David Resler. Nomura had expected a gain of 65,000 jobs in April, due mainly to the same seasonal factors Barclays took into account. Now, Resler thinks a drop in payrolls could be more likely.
"The job picture is as bad as it's been in the past 18 months," Resler said. "I don't think we can find enough special qualifying factors to give us an increase in payrolls."
Businesses comfortable on the sidelines
The biggest problem for the labor market recently has been an utter lack of business optimism. Most economists, including Federal Reserve Chairman Alan Greenspan, have said for months that businesses were delaying investment and hiring because of uncertainty about the effects of the war with Iraq.
But jobless claims have continued to rise even after the war ended, and it's starting to look like businesses had a little more on their minds than any regime change in Baghdad.
Most economists, including Greenspan, believe business optimism will eventually recover. Oil prices, which acted as a sort of tax on businesses and consumers when they jumped in the months before the war, have fallen recently. Interest rates are at their lowest level in 41 years.
Meanwhile, inventories and payrolls are lean and mean, helping output per worker hour in 2002 post its biggest gain since 1950. This increased productivity has bolstered profits, and helped businesses ease some of the sting of the bursting of the late-1990s investment bubble, which left many companies with messy balance sheets.
Will tax cut add jobs?
And many economists are looking to Washington for a tax cut, which they think will help lift corporate spirits this year. President Bush is busily urging Congress to pass a tax cut of at least $550 billion, instead of the "little bitty" $350 billion tax cut the Senate wants.
Bush says the bigger cut will translate into more jobs, but many economists doubt it. The skeptics say the bigger cut would include the elimination of most individual dividend taxes, which is unlikely to help the job market anytime soon.
"I don't think much of the president's plan, in part because it spends a lot of money on ineffective stimulus," said Jeffrey Wenger, labor economist at the Economic Policy Institute, a think tank in Washington that has been an active critic of the Bush's tax plan. "The administration has even backed away from this being a stimulus plan. Now it's a long-term jobs and growth plan."
Wenger and many Democrats would prefer to see the federal government give money to cash-strapped state and local governments, which are busy firing workers and raising taxes, possibly offsetting any stimulus that might come from the federal plan.
Other economists believe the president's plan will help, but there's little consensus, even among the plan's supporters, about how many jobs it will create in the short run.
A Congressional Budget Office study, headed by Douglas Holtz-Eakin, formerly chief economist of Bush's Council of Economic Advisors, said even the president's original $726 billion plan would provide "a relatively small impetus" to the economy. A PricewaterhouseCoopers study commissioned by the Business Roundtable said the full plan might have added 800,000 jobs in 2003.
Regardless of what happens with the tax plan, however, many economists think labor-market improvement will be very slow this year, which may hurt consumer confidence, stifle wage growth and possibly inspire the Fed to cut interest rates this summer.
"The longer the labor market takes to improve, the more and more you increase the chances that consumer confidence, despite the victory bounce, will fall back again," said former Fed economist Wayne Ayers, now chief economist at Fleet Boston Financial Corp. "That's significant, of course, since the consumer's been keeping the economy afloat."