Economic analysis: Rate Uncertainty Could Damage Business

The stunningly strong employment report that rattled windows on Wall Street 10 days ago could trigger aftershocks into the second half of the year if interest rates end up staying too high.

Many economists and analysts assume the report, with its explosive tally of 705,000 new jobs in February, was an aberration. Later data, however, have offered a mixed view of the economic situation.

Last week, for instance, both the Producer Price Index and consumer price index for February reflected a continued trend of moderate to flat inflation. But the manufacturing sector rebounded from a January low, and consumer sentiment improved.

The uncertainty stirred by the jobs report and subsequent data has created anxiety in the bond market, and it could cause the Federal Reserve to postpone further interest rate cuts for several months, which could in turn dampen business conditions later in the year.

"It's doubtful now that the Fed will ease this month," said Stuart G. Hoffman, economist at PNC Bank Corp., Pittsburgh. "They will probably wait until May, or perhaps the summer, when they have further data to clarify the economic picture."

"The jobs report wasn't a clean report, but it's going to take time to uncover just how much noise there was, weather-related and otherwise," said Anthony Karydakis, senior financial economist at First National Bank of Chicago, a unit of First Chicago NBD Corp.

The report caused stock and bond prices to plunge and interest rates to rise on the sudden expectation of strong economic growth. Banking and other financial stocks were among the hardest hit and the slowest to recover.

Lacy H. Hunt, chief economist at HSBC Securities Inc., said the jobs report was probably skewed by special factors, such as construction industry workers, usually idle in winter, being deployed to remove record snows in the Northeast.

In addition, jobs were atypically added to the retail sector in February. Mr. Hunt suggested this occurred because fewer temporary workers had been hired by retailers in the fourth quarter, which was the slowest Christmas selling season in several years.

Mr. Hunt suspects some of these special factors will reverse themselves in the next several monthly job reports, depicting a much more moderate, even anemic, growth rate for the economy.

Indeed, Mr. Karydakis noted that the March jobs survey was conducted last week and thus will reflect the growing effects of a strike in the automobile industry.

Meanwhile the recent spike up in interest rates, made worse by the latest jobs report, raises the cost of mortgage finance and hurts the housing industry at the start of its vital spring season, Mr. Hunt noted. Mortgage applications fell 17% in the latest weekly report.

In sharp contrast to February, Mr. Hunt said, the March jobs report may be flat, leaving the net employment gain for the first quarter at 500,000 jobs. That is virtually no different than what the nation did in the weak fourth quarter - but in the meantime long-term interest rates have risen.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER