Closing Market Report

Star-Bulletin news services

Weak job growth could
hamper consumers, drag
down economy

NEW YORK >> The feeble job growth in the government's February employment report surprised economists and made the markets shudder, but the prospect of continued low interest rates softened the blow on Wall Street.

Stocks have surged as companies enjoy the increased borrowing power that comes with lower rates, and the economy seems to be improving steadily. But the absence of new jobs has kept analysts from declaring a victory over the bear market. It's also deterred the Federal Reserve from raising rates.

As a result, yesterday's news that the nation's employers added just 21,000 positions last month, when economists were expecting an increase of 125,000, met some ambivalence in the equity markets. Stocks sank at first, but rose to mostly unchanged levels as investors decided a longer period with lower rates didn't sound so bad.

Still, some worried that the meager job growth could harm consumer confidence, or portend a drop in productivity. Sung Won Sohn, chief economist with Wells Fargo & Co. in Minneapolis, said investors should be cautious because there's a rising risk of an economic slowdown later this year.

"This is a terrible number," Sohn said. "Obviously the relationship between economic growth and employment has broken down."

In a recovery that is almost three years old, the economy should be producing 200,000 to 300,000 new jobs every month, Sohn and other economists say. In fact, the Fed has indicated it was unlikely to raise rates without several consecutive months of that kind of growth.

Investors may like the fact that an interest rate rise is on the Fed's back burner for now, Sohn said, but ultimately what drives the market is earnings growth, which depends on a strong economy. Without significant increases in jobs, consumer buying power and confidence will be hurt, and businesses will probably cut back on spending.

"Consumer spending counts for two-thirds of the economy, and anemic jobs growth means poor consumer spending, and therefore a weak economy," Sohn said. "I think this is not good news for the stock market."

John Caldwell, chief investment strategist for McDonald Financial Group, took a similar view, saying, "Without jobs creation, the consensus view of 4.5 (percent) GDP growth this year is a pipe dream."

Among the ripple effects of the jobs report was renewed weakness in the dollar, which recently seemed like it was about to emerge from its slump against foreign currencies. The dollar's malaise, a byproduct of historically low interest rates, has helped boost profits for big exporters and manufacturers with interests overseas.

The dollar actually was a non-issue in the stock market for years, but its recent gains made some investors wary about the implications for multi-national companies. They also raised the possibility that foreign investors might lose their appetite for U.S. Treasurys, a concern for the bond market.

Bonds rallied on the low jobs number, however; prices surged and yields fell to the kind of levels mortgage refinancers love. The yield on the 10-year note dipped to 3.85, its lowest level since July 2003.

"Basically people are factoring out the Fed for the most part for the rest of the year," said Stephen Stanley, chief economist at RBS Greenwich Capital, a fixed income firm. "I think a lot of people are taking a step back and feeling maybe the jobs growth is not going to come at all, or that it will take a long time if it does."

Between earnings seasons, and with the first-quarter GDP numbers not due until April, the next significant piece of news for the markets may be the March jobs report. That means investors may continue to trade the markets in their current sideways pattern for another month, said Joseph T. Keating, chief investment officer at Amsouth Asset Management.

"It may just be a lackluster time, and in an environments like that, the market is susceptible to a downward drift," Keating said. "It raises the possibility for some modest type of correction to take hold."

The Dow Jones industrials ended the week up 11.63, or 0.1 percent, finishing at 10,595.55. The Standard & Poor's 500 index gained 11.93, or 1.0 percent, to close at 1,156.87.

The Nasdaq added 17.81, or 0.9 percent, during the week, closing yesterday at 2,047.63.

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