Why Bernanke's still hedging
Wednesday's jobs numbers were weak, but the data show the economy is hardly in free fall.
NEW YORK (Fortune) -- Wednesday's employment report shows why policymakers continue to tread carefully when discussing the state of the economy.
The United States added 8,000 private nonfarm jobs last month, according to this morning's ADP National Employment Report. March's report is the latest soft reading on the national jobs picture. In February, the economy shed 18,000 jobs, according to revised data from ADP (ADP, Fortune 500), and economists expect to see the official unemployment rate rise to 5% on Friday when the Bureau of Labor Statistics announces its monthly figures.
"This was a weak report," says Joel Prakken, chairman of Macroeconomic Advisers, which prepares the ADP data. "Employment was essentially flat." This means job creation is lagging behind population growth, so there are more workers competing for each job.
Together with troubles in the housing market and the flat wages of recent years, weak employment growth offers the average American yet another reason to be unhappy about the economy. This helps to explain why there is so much discussion nowadays of whether the United States is in, or heading toward, a recession. Prakken noted that his firm's models show the "recession possibilities are elevated right now," meaning the chance is about 50-50.
Fed Chairman Ben Bernanke acknowledged as much in his testimony before Congress Wednesday morning. In remarks to the Joint Economic Committee of Congress, Bernanke said he believes the economy is still growing, if slowly. But he added that given falling house prices and weak employment growth, "It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly."
Given the Fed's previous insistence that the housing mess was contained, Bernanke's latest bit of hedging drew a predictable hail of brickbats. "Fed Chairman Ben Bernanke became the last human in America to acknowledge the possibility of a recession this morning," disgraced former securities analyst Henry Blodget wrote Wednesday on the Silicon Alley Insider website. "He didn't say the word 'recession,' of course, but he did say the risks to this forecast are still on the downside."
Indeed, it's hard to ignore the prospect that the economy could get worse. The financial sector remains severely constrained in its ability to lend money, as banks ranging from Citi (C, Fortune 500) to UBS (UBS) struggle to write down the value of souring mortgage-related securities. That could make it harder for businesses to get funds to expand and hire new workers. Meanwhile, retailers such as J.C. Penney (JCP, Fortune 500) are coming under intense pressure as consumers, who are now less able to borrow on the value of their homes, pull back on their spending. Lakshman Achuthan, managing director at the Economic Cycle Research Institute, said on Bloomberg TV last week that gross domestic product trends could turn negative this year.
Yet, while it's clear that the economy is at best muddling along right now, Wednesday's ADP report on jobs wasn't all bad news. Small businesses - those with fewer than 50 workers - accelerated their hiring last month. They added 55,000 jobs in March, ADP said, up from a revised 16,000-job gain in February. Even the minuscule 8,000 jobs added beat the Wall Street consensus, which was looking for a loss of around 45,000 jobs.
Prakken notes that other indicators have been, if not bullish, at least not supportive of a doomsday scenario. He notes that Wednesday's Challenger layoff report showed a 26% decline from February levels, though most economists prefer the seasonally consistent year-over-year comparison. On that measure, layoffs were up 9% from a year ago. Other reports, such as the Michigan consumer sentiment survey, the Institute for Supply Management survey of U.S. manufacturing and the latest durable goods data, have all been soft but better than expected, Prakken says.
The jobs numbers aren't the only area where it's possible to take heart in what has been a largely gloomy picture.
Financial stocks held their ground in trading Wednesday on the heels of their massive April Fool's rally. Shares in hard-hit names such as Citi and Fannie Mae (FNM) posted double-digit percentage gains Tuesday after Lehman Brothers (LEH, Fortune 500) succeeded in raising $4 billion of capital and UBS took another huge writedown. The gains show that for the moment, investors are hoping "maybe the worst is behind us," Prakken says. Even if the housing and manufacturing sectors are in for more pain, he says, "the mood seems to have brightened a bit."
Another view is that regardless of the state of the economy or the problems yet unresolved on bank balance sheets, March's stock-market selling brought the market to a tradeable bottom. As a result, investors are now taking another look at the financial sector, where recent Fed action promises at the very least to prevent a repeat of last month's run on Bear Stearns (BSC, Fortune 500). And with a recent demand-fueled surge in the price of risk-free Treasury bonds, the 6% dividend yields available at Citi and Washington Mutual (WM, Fortune 500) appear to be striking some investors as very appealing.