Economy 'not out of the woods'

USA Today

Just days after unexpectedly robust growth numbers suggested the economy might have escaped a recession after all, grim new readings on jobs and the economy's non-manufacturing sector signaled that the worst may still be coming.

"The economy's clearly not out of the woods," said Gerald Cohen, a senior economist with Merrill Lynch. The numbers prompted analysts to begin raising the likelihood that the Federal Reserve will make another half-point rate cut when it meets May 15.

Yesterday's data came barely a week after other numbers showed the economy grew at a 2 percent annual rate in the first 3 months of the year, about double what most economists expected and far better than recession forecasters had predicted.

The new numbers add to the sense that the economy will dip in the April-June quarter, possibly renewing the prospects of a recession. The new data showed:

• Initial claims for unemployment insurance jumped to 421,000 last week. Except for a week in 1996 when a General Motors' strike pushed claims to 428,000, that was the worst reading since August 1992, when the economy was still slogging through the "jobless recovery" from the 1990-91 recession. The 4-week average rose to 404,500, the worst since October 1992. Economists say a reading of 450,000 would indicate recession.

• In an ominous turn, the USA's service sector — banks, phone companies, dry cleaners and just about every other business outside manufacturing — began to contract in April, according to the National Association for Purchasing Management. The NAPM non-manufacturing index fell to 47.1 in April from 50.3 in March. Any reading below 50 — and this was the first since the non-manufacturing index began in 1997 — indicates the sector is contracting.

NAPM surveys have shown the much-smaller manufacturing sector in recession for months, but the non-manufacturing sector, which accounts for roughly 80 percent of the economy, had escaped the downturn until now.

"The weakness in manufacturing is finally (spreading to) the rest of the economy," said Ralph Kauffman, who conducts the monthly NAPM non-manufacturing survey.

• Corporate layoff announcements in April hit a record level, according to outplacement firm Challenger Gray & Christmas, which tracks layoff stories in major newspapers.

The number hit 165,564 in April, surpassing the previous record set in March and marking the fifth-consecutive month in which layoffs exceeded 100,000.

The definitive word on April's jobs picture comes today with the Labor Department's monthly employment report. Despite the surge in layoffs and jobless claims, economists expect that April saw modest job growth and an unemployment rate that will rise to 4.4 percent, up from 4.3 percent in March and 4.2 percent in February. The jobless rate hit a 30-year low of 3.9 percent in October.

Taken together, though, yesterday's news was a worrisome sign that the economy might be weakening, rather than rebounding. "Employment gains, income growth, consumer spending and overall economic activity will all be slower" in the second quarter than they were in the first, said Steven Wood, chief economist for FinancialOxygen.