Sponsored by:

Comment, blog & share photos

Log in | Become a member
The Honolulu Advertiser
Posted on: Monday, March 22, 2004

Weak job market keeps interest rates at low levels

By William Sluis
Chicago Tribune

As the first quarter chugs into its final 10 days, economists are confident that interest rates are on hold and won't budge from a 45-year low.

Their reasoning: Although the economy has recently been advancing at a 4 percent-plus rate, not many jobs are being added. As long as payrolls are in the doldrums, the Federal Reserve will avoid any action that would disrupt hiring.

The benign attitude of central bankers could be altered quickly, however, if the percolating economy began to boil and corporations started to boost payrolls rapidly.

Chicago economist Robert Dederick sees such a possibility, but he doesn't look for anything imminent.

While he isn't looking for much news in Thursday's final revision of fourth-quarter gross domestic product, from the 4.1 percent rate announced earlier, Dederick thinks the economy is rolling along at a growth rate between 4 percent and 5 percent.

"The economy isn't bursting at the seams, although it is pushing ahead at a solid, unspectacular pace," said Dederick, who is with RGD Economics.

The question for the job market, he said, isn't whether it will improve, but when.

"Economists have been calling for a breakout of hiring, but little has happened month after month," he said.

As for interest rates, he believes they will remain on hold until at least late summer.

"It will take a succession of large payroll increases for several months before the Fed would try to throw an interest rate increase at the public," Dederick said. "Any move on rates will be a direct function of what happens in the job market."

A steep 1.8 percent drop in orders for durable goods in January had some analysts wondering whether the economy's staying power might be suspect.

Don't look for any repeat of such a decline, however, in Wednesday's report of orders for February. Economist John Silvia is looking for a solid advance of 2.5 percent.

"Every regional indicator of manufacturing activity is telling us that orders are continuing to grow," said Silvia, who is with Wachovia Securities in Charlotte, N.C.

With clear signs that productivity is growing and tax incentives are providing stimulus, he said, "all the elements are in place for the factory sector to do well."

The construction industry has endured several setbacks blamed on harsh winter weather, with housing starts for February down 4 percent after an even bigger decline a month earlier.

Fresh reports are due Wednesday, with February new single-family home sales, and Thursday, with the month's sales of existing homes. Both could show the real-estate market still struggling with the seasonal blahs.

But economist Ian Shepherdson says there is little cause for caution as spring begins.

Shepherdson, who is with High Frequency Economics in Valhalla, N.Y., said: "With mortgage demand likely to strengthen over the next couple of months as a result of the drop in mortgage rates, both sales and starts may well pick up again. The great housing slowdown is not here yet, and its arrival has been deferred."

For the stock market, only eight days of trading remain before the end of the quarter, and thus far all signs are flashing no gain. In fact, most investors have small losses on Wall Street since the year began.

Those who fear more problems for the market say stock prices moved too far, too fast, late last year and were in need of a break. The result is a lull that began in late January.

Others say investors are uncommonly focused on world events, including oil prices that are pushing $40 a barrel as well as the unhappy consequences of terrorist attacks in Spain.

For now, Wall Street has turned its attention away from the double-digit jump in corporate earnings that is expected in about two weeks, when companies begin reporting first-quarter results.