Job Growth Looks Rosier, Easing Recession Fears

By MICHAEL M. GRYNBAUM

Published: October 6, 2007

The portrait of the economy took on a strikingly different cast yesterday.

Job growth was much stronger this summer than the government had first estimated, the Labor Department said, easing fears of a recession and making it less likely the Federal Reserve will cut interest rates when it meets at the end of this month.

The economy added 110,000 jobs in September and roughly 90,000 in both July and August, according to the new report. The Labor Department had reported a month ago that the economy lost 4,000 jobs in August.

Wall Street responded favorably to the news, with the Standard & Poor’s 500-stock index jumping almost 1 percent to close at 1,557. The Dow Jones industrial average rose nearly 92 points, or 0.6 percent, to 14,066.

The government’s economic data is revised every month as new information becomes available, but the changes are rarely so large or present such a different picture of the economy from the initial snapshot. Last month’s unexpectedly weak unemployment report prompted a stock market sell-off, amid worries that the housing slump was spreading to the broader economy, and helped spur a half-point reduction in the Fed’s benchmark interest rate.

The new data suggests that economic growth has indeed slowed this year and that hiring in the private sector has weakened considerably, but the overall economy no longer appears to be on the verge of a recession, economists said.

“It gives the Fed room to stand back and do nothing and just continue to assess,” said Joshua C. Shapiro, chief United States economist for the research firm MFR. “If the meeting were today, I think they would do nothing.”

President Bush hailed the report while speaking at the White House yesterday morning, referring to it as a sign of a “vibrant and strong economy.” He noted that the economy has added jobs in 49 consecutive months and used the occasion, as he has many times in the past, to urge Congress to resist any tax increases.

Many investors still expect the Fed to cut its benchmark short-term interest rate, now at 4.75 percent, by another quarter of a point before the end of the year. The housing market has continued to worsen, and forecasters said that the economy was still at risk of weakening in coming months. Any fresh signs of distress are likely to prompt the Fed to move quickly, economists said.

“I don’t think we’re totally out of the woods,” said Jan Hatzius, chief United States economist for Goldman Sachs. “There are some real problems at the foundations of the economy. If nothing really bad happens, we can muddle through and unwind some of these problems over a lengthy period of time. And if something bad happens, we go into a recession.”

The unemployment rate ticked up to 4.7 percent last month, from 4.6 percent in August, a reflection of the slowdown in hiring over the course of 2007.

In 2005 and 2006, the job market was in its strongest condition since the late 1990s, adding about 200,000 jobs a month and causing wages to outpace inflation. But as the housing market has weakened, oil prices have risen and consumer spending has slowed somewhat, job growth has faded, to just under 100,000 a month over the last three months.

Private-sector payrolls are growing at their slowest annual rate since April 2004.

“We’re likely to go through an extended period of slow economic growth in the United States,” said Ethan Harris, the chief United States economist at Lehman Brothers. “We’re likely to see a further drop in the job market, a further rise in the unemployment rate, and ultimately the Fed will come back again and cut interest rates.”

The average hourly wage of rank-and-file workers — who make up about 80 percent of the work force — reached an all-time high of $17.57 last month, even after taking inflation into account. Two years ago, the hourly wage was $17.01, adjusted for inflation.

Pay continues to outpace inflation, but wage growth has been unusually weak over the course of the current economic expansion, and the softening of the job market this year has caused wage growth to slow. Unless hiring picks up again in the coming months, the wage increases of the current expansion are likely to fall far short of those during the late 1990s.

The vast majority of yesterday’s revision came in government jobs, with 71,000 jobs in local education being added to the preliminary estimate. It was the first time that nonfarm payrolls were revised from a loss to a gain in the following report since October 2002.

“I can’t explain why it happened; to some extent, it’s just chance,” said Thomas L. Nardone, an economist at the Bureau of Labor Statistics who oversees the jobs report. Mr. Nardone said that early surveys of schools simply did not reflect the actual job growth.

Richard Moody, the chief economist at Mission Residential, a real estate investment company, noted that school districts in several large states had delayed the start of their school year. As a result, the usual August surge in education employment — which the Labor Department’s seasonal adjustments are intended to account for — did not happen until September this year.

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