As layoffs spread to services, economic outlook dims

Hope that the economy has bottomed out may be premature. Instead, it now looks as if all the layoffs in April will drag the economy still lower, almost certainly prompting the Federal Reserve to slash interest rates again.

That's the conclusion economists are drawing from a Friday report showing unemployment shooting up to 4.5 percent, while the number of jobs actually fell by 223,000, the worst performance since the recession of 1991.

April is the second consecutive month that the US job machine has sputtered. Two monthly drops are rare, out of recession, says Mark Vitner, an economist at First Union Bank in Charlotte, N.C. Three-quarters of the time, he says, it signals the onset of a recession.

Layoffs are still rampant in the manufacturing sector, which has lost more than 100,000 jobs each of the past five months. "Business is reacting to the profit squeeze by reducing payrolls," says Richard DeKaser, economist at National City Corp., a bank in Cleveland.

Moreover, the layoffs are spreading to services. For example, employment declined in April for hotel and tourist attractions - a bad sign for the summer. This might drag down employment in May, some predict.

Yet, despite the bad news, some economists still don't think the nation will slip into recession. Only two weeks ago, many thought the economy had bottomed out when the government reported that it grew at a faster-than-expected 2 percent annual rate in the year's first three months. Although that number is likely to be reduced once more information is available, it's not expected to slip into negative territory. On the basis of the unemployment numbers, economists say the economy is currently growing by less than 1 percent, if at all.

"The economy is at the edge of the door of recession, but has not walked through yet," says Stuart Hoffman, chief economist for PNC Financial Services Group in Pittsburgh.

Economists now expect the Federal Reserve to lower interest rates by a half percentage point when it meets on May 15.

If the Fed does drop rates that much again, it would be the fifth straight half-percent rate drop. "It's the most rapid-fire rate cuts we have ever seen," Mr. Hoffman says.

The Fed's actions will lower short-term rates, such as the prime interest rate - the base rate used for many corporate loans. Some credit card companies also base interest rates on the prime, so a lower rate may help some consumers. Long-term interest rates have already factored in some of these rate cuts, with mortgage rates now down to about 7 percent. This is prompting a spate of refinancing, which should help consumer balance sheets.

In fact, some economists think a rate drop in May will not be enough. They are expecting the Fed to lower rates in June as well - perhaps by a quarter point. "In the latest employment report, the number of hours worked dropped. This might be an indicator of weakness in next month's employment report," says David Wyss, an economist at Standard & Poor's.

Despite the current weakness, economists still expect the second half of the year to be stronger. The proposed tax cut, worth $100 billion this year, could add half a percentage point to economic growth in the third quarter and fuel good growth through the first half of 2002, predicts Salomon Smith Barney, an investment house.

The prospect of lower interest rates helped the stock market, which shrugged off the bad economic news on Friday. "I think [investors] are putting a lot of faith in Greenspan and the Fed being able to prevent a recession," says Robert MacIntosh, vice president of Eaton Vance Management, a mutual fund company in Boston.

But he is skeptical that rate cuts can offset the job losses. "I'm more worried than I have been. I have to be shown more before I put my equity investments on the line."

(c) Copyright 2001. The Christian Science Monitor