U.S. unemployment rate hits 4.2 percent

The Labor Department's unemployment report yesterday nevertheless offered rays of hope that the country can avoid a full-blown recession, showing surprisingly strong job growth in construction and other areas.

Economists viewed the report as depicting an economy weak but not in danger of toppling into free-fall. They were encouraged that overall payrolls increased last month at three times the expected amount, by 268,000 new jobs, the strongest showing in nine months.

"Most of the really alarming data has related to the manufacturing sector, which clearly is slumping, but since it only accounts for about 15 percent of total employment, it isn't dragging everything else down,'' said Bill Cheney, chief economist for John Hancock Financial Services.

But on Wall Street, investors, fearful about the economy's direction, unloaded technology shares. The Dow Jones industrial average lost 119.53 points to close at 10,864.10.

The 0.2 percentage-point rise in January's unemployment rate from December's 4 percent marked the biggest one-month jump since April 1999. The last time the jobless rate stood at 4.2 percent was in September 1999. Many analysts had expected a January rate of 4.1 percent.

The red-hot economy during the first half of 2000 helped keep the nation's unemployment rate low, and during three months of last year it reached its lowest point in a generation, 3.9 percent.

"The slowing economy is finally taking its toll on the labor market. Conditions for workers are less stable than they were a quarter or a year ago,'' said Jared Bernstein, economist with the Economic Policy Institute, a think tank partly funded by labor.

Economists are forecasting a jobless rate as high as 4.5 percent by the summer.

Labor Secretary Elaine Chao said the increase in the unemployment rate underscores the need for President Bush's 10-year $1.6 trillion across-the-board tax cut to help bolster economic growth.

"President Bush's tax cut will allow workers to keep more of their paychecks — helping workers, families and the economy,'' she said in a statement. "The president's tax cut is the answer to stimulate the economy and head off further unemployment, but it must be passed soon to have needed impact.''

Average hourly earnings showed no change in January, remaining at $14.02 an hour, a byproduct of the slowing economy. The length of the average work week, which posted a big drop in December, rebounded slightly to 34.3 hours in January.

Seeking to prevent the faltering economy from sliding into recession, the Federal Reserve this week cut interest rates by another half-point, the second such reduction in the space of three weeks. Economists expect further rate reductions to rev up economic growth, but they believe Friday's report reduced the chance that the central bank would need to cut rates before its next regular meeting in March.

Even with the sharp rise in unemployment, payroll growth posted a sizable gain of 268,000 in January. More than half of that came from an increase of 145,000 jobs in construction, aided by mild weather during the month. That marked a rebound after unusually harsh weather in November and December resulted in huge layoffs.

The services industry added 81,000 jobs in January, even though temporary-help firms cut employment by 39,000. Hospitals and doctors' offices reported solid gains. So did real estate firms and mortgage bankers, showing the strength in the housing sector, where cheaper mortgage rates have helped the industry stay healthy during the slowdown.

The report, said Merrill Lynch's chief economist, Bruce Steinberg, "points to a sluggish, but not recessionary, economy.''

Manufacturing was the hardest-hit sector, losing 65,000 jobs last month, the largest decline in five months, and bringing total factory losses to a quarter-million since June. Auto makers posted the biggest decline, 38,000 jobs, as they tried to trim production in the face of slumping sales.

More layoffs are on the way. DaimlerChrysler announced this week it was cutting payrolls by 26,000.

Another report yesterday showed that factory orders rose 1.1 percent in December, reflecting a big jump in demand for airplanes and other transportation equipment that masked weakness elsewhere.

Excluding transportation, orders fell 0.8 percent to the lowest level since April, the Commerce Department said. Shipments, a barometer of current production, fell by 0.2 percent, the fourth straight monthly decline.

Overall economic growth slowed to an annual rate of just 1.4 percent in the fourth quarter, the weakest performance in more than five years. Federal Reserve Chairman Alan Greenspan has estimated that growth in the current quarter could be "very close to zero.''

The severity of the drop in economic activity caught the Fed by surprise, but private analysts believe the aggressive interest rate cuts with the promise of more to come should be enough to keep the country out of recession.

"I think the report bodes reasonably well for our ability to avoid a recession, because you still have 95.8 percent of the labor force at work,'' said Carl Tannenbaum, chief economist with LaSalle Bank/ABN AMRO. "The job picture is not that bad. There's some soft spots, but in most places it is still relatively healthy.''

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