Increasingly weak job growth is likely to dictate more interest rate cuts from the United States Federal Reserve in the first quarter of 2008, regardless of an uptick in inflation.
The Federal Open Market Committee's (FOMC) single-minded focus on the growth-vs-inflation mix has been diverted by the global credit crunch that began in August.
If money market pressures recede in the new year, as many hope, the FOMC will be able to focus more on economic fundamentals.
"At this point, the labour market has to weaken for the Fed to cut several more times in 2008," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
The Fed has cut its benchmark federal funds rate by 100 basis points since mid-September, to 4.25 per cent.
Central bankers meet January 29-30 to mull the next move, and will also issue updated economic central tendency forecasts.
"Fed officials are remarkably sanguine about the labour market, given that they also expect significant slowing in the growth rate," said economists at Goldman Sachs.
The mid-point of the Fed's October central tendencies forecasts reflected only a marginal rise in joblessness in 2008, to 4.85 per cent from 4.75 per cent in 2007, while the mid-point for GDP growth was knocked down to 2.15 per cent from 2.45 per cent.
"Fed officials are vulnerable to unpleasant surprises in the labour market," Goldman said. "The labour market is in a slow but steady process of deterioration."
LUKEWARM LABOUR MARKET
Several tepid employment indicators this week have created a negative bias towards the December nonfarm payrolls report, which is due on January 4, and is potentially the biggest piece of data before the FOMC meeting at the end of the month.
On Friday, the Chicago purchasing managers report on the regional economy showed hiring in negative territory in December for the second time in three months, even as regional output rose more strongly than expected.
The Conference Board's help-wanted index for November was reported at 21 versus a downwardly revised 22 in October, and down from 29 a year earlier.
It was the lowest reading in a series that stretches back to 1951.
The index measures job ads in U.S. newspapers, but data for online advertising also point to reduced recruitment efforts, said Ken Goldstein, labour economist at the Conference Board, a private research group based in New York.
Meanwhile, Thursday's jobless claims for the week ended December 22, at 349,000, were the highest in a month and pushed the four-week average to the highest since October 2005.
Continuing claims at 2.646 million were the highest since November 2005.
Claims have been grinding higher without an external shock such as Hurricane Katrina in late August 2005, which caused months of economic dislocation.
Arguably, the troika of high gasoline prices, a chilly home sales outlook and the global credit crunch have had an impact similar to a natural disaster.
A RED FLAG VS RECESSION TRIGGER
Analysts also jumped on the employment component of Thursday's consumer confidence report for December.
For the first time since 2005, the percentage of respondents saying jobs were "hard to get" was higher than those deeming jobs "plentiful".
Research from Wachovia Economics Group in Charlotte, North Carolina, suggests that the Conference Board's jobs index correlates strongly with year-on-year changes in employment over the last two decades.
"Consumers appear to be waving an employment warning flag," Wachovia economist Anika Khan said.
The consensus in a Reuters poll puts December payrolls at 70,000, down from 94,000 in November and the lowest since September, with the jobless rate rising to 4.8 per cent from 4.7 per cent.
Manufacturing and construction employment are both likely to fall, and analysts also see a risk to retail jobs, given weakness over the holiday shopping season.
"The economy is becoming more services oriented and for a while, job gains in other services can keep the labour market on track, despite the heavy losses in construction, manufacturing and finance activities," Rupkey said.
However, "when total payrolls jobs decline, this pretty much defines the start of a recession."
Weekly jobless claims in the 360,000 to 370,000 zone could also be a recession trigger, he said.
Many economists expect the U.S. to avoid falling into recession with the help of another 50 basis points or more (in some cases, much more) in easing from the Fed.
Interest rate futures, which measure market sentiment toward Fed policy, are confident of a quarter-point rate cut in January and another by the April FOMC meeting, which would take the fed funds rate down to 3.75 per cent.
"Expect the U.S. economy to remain 'flying on low fuel'," said Eugenio Aleman, senior economist at Wells Fargo Economics in Minneapolis.
- Reuters
