Back-to-Back Monthly Job Gains Make Interest-Rate Cuts Unlikely

HAS the US economy turned a corner?

After large, back-to-back gains in employment in February and March, the long-sluggish economy suddenly looks more vigorous as it enters its sixth year of expansion.

But the good news for job-seekers may be bad for interest rates, bonds, and stocks. If the economy is in transition to a period of stronger growth, the Federal Reserve may not reduce interest rates again any time soon. This prospect caused the bond market to plunge Friday. Both short- and long-term interest rates rose sharply.

"It's a disaster," says Bill Sullivan, an economist at Dean Witter Reynolds in New York. "We are in the process of dismantling the conventional wisdom that the Fed will cut rates again, and instead rates could still go higher."

In the past big downdrafts in the bond market have led to declines in the stock market. Since the exchanges were closed for Good Friday, any reaction to the employment report will be delayed until today.

"I would expect the market to be weak on the open on Monday, but I don't think this is the beginning of a big slide," says Donald Straszheim, chief economist at Merrill Lynch & Co. in New York.

More jobs than expected

The Labor Department report surprised many economists who had expected that the February numbers would be revised down and March would show little growth. "They were a touch stronger than we expected," says Ram Bhatavatula, an economist at Citicorp in New York.

The March numbers were adjusted for the impact of the recent General Motors strike. However, the loss of jobs in Detroit was mostly offset by people who found jobs working on the presidential primaries.

The job growth was partly offset by a rise in the unemployment rate, which hit 5.6 percent, up from 5.5 percent in February. But most of the talk is about the job-generating economy. March's healthy increase of about 140,000 jobs suggests that the sharp increase in jobs in February may not have been a fluke.

Aside from employment gains, economists are starting to look at other evidence of better times.

In February and March, for example, the average hours worked rose at about a 1 percent per quarter rate. With employment showing a steady rise and hours worked increasing, the economy is "shaking out of its torpor," says economist Robert Brusca of New York-based Nikko Securities Company International. He now predicts the economy will grow 3 percent in the year beginning in the fourth quarter of 1995. "This is higher than the Fed thinks," Mr. Brusca says.

Not all economists are so optimistic. Mr. Straszheim says the job numbers do not indicate the economy is "racing out of control."

And on Friday, the White House put a positive spin on the Labor Department report. Economic adviser Joseph Stiglitz told Reuters, "We have had unemployment rates at this level for an extended period of time without any inflationary pressures."

On Thursday, the government issues the producer price index for March, and on Friday the March consumer price index, the most closely watched indicator of inflation, is released.

Behind strong March growth, some economists believe, might be the increased pace of federal income-tax refunds. The refunds are averaging about $1,400 per household. "Some people are getting sizable checks," says Cynthia Latta, an economist at DRI/McGraw-Hill, an economic forecasting firm in Lexington, Mass.

Economist Richard Hokonson of Donaldson, Lufkin & Jenrette says those big returns are an important factor in the February rebound in sales of big-ticket consumer durable goods, such as automobiles.

"Income-tax refunds are an important and often-overlooked issue in terms of consumer purchasing-power and patterns of outlays," Mr. Hokonson wrote in a research report last month. He notes that consumers often use the refunds as the down payment for a car or truck.

In a possible confirmation of this observation, automakers reported on Friday that March auto and light-truck sales increased by 4.3 percent. This was better than expected. At Ford Motor Company, light-truck sales were a monthly record. Ford officials said auto company rebates were helping to fuel demand.

The increase in March was higher than in February, which was considered a strong month. In anticipation of the trend continuing, Chrysler Corp. said it would increase its second-quarter production from last year's second-quarter levels.

Retail sales: uncertain

On Wednesday, the government issues its report on March retail sales. Economists will be watching these numbers to see if consumers are using some of their refund money for goods other than autos.

"One would have thought March would have benefited from an early Easter," says Mr. Bhatavatula. However, he thinks retail sales will be disappointing. "The consumer is not in a great spending mood," he explains.

Consumers may be starting to have problems with their debt loads. Credit-card delinquency rates are rising. "The banks are likely to tighten up on the credit lines," Bhatavatula says. But any impact of this is still months away.