US jobs figures confirm slowdown

Alan Greenspan's first rate cut sent shares surging

The problems of the US economy have been thrown into sharp focus by new figures which show that job growth is slowing.

Shares in New York continued to fall on the news.

By mid-morning the Dow Jones Industrial Average of leading shares was down 167 points at 10743, while the high-tech Nasdaq index fell more than 3%, or 83 points to 2484.

Shares had rallied earlier in the week after the US central bank made a surprise move to cut interest rates by 0.5%.

But the signs of further weakness in the economy renewed fears that the Fed action might be too little, too late to reverse the slowdown.

Fewer jobs, slowing economy

In the last quarter of 2000, job growth slowed to 84,000 per month, less than half the rate of job creation in the first three-quarters of the year.

While the US economy created 105,000 jobs in December, the manufacturing recession gathered steam, with 65,000 job losses in that sector.

And the number of jobs created in November was revised downwards substantially, to 66,000.

The unemployment rate was stable at 4.0% and wage growth continued to slow.

Wages rose by 0.4% in December, but weekly earnings fell slightly, indicating a reduction in overtime and hours worked.

While financial markets can react instantaneously to changes in Fed policy, the real economy takes much longer, and the recent trends in the US economy are quite weak

Robert Sinche
Citibank

"The employment numbers, although they were close to expectations and maybe a little bit weaker, confirm that the economy generally is slowing.," said Hugh Johnson of First Albany.

And Stan Shipley of Merrill Lynch said the report showed the economy was weakening, and predicted that the Fed would cut interest rates by another 0.25% at its 30-31 January meeting.

Tax cut issue

Meanwhile, President-elect George W Bush said that his $1,300bn tax cut plans may have to be speeded up to help kickstart the slowing US economy.

"I think that tax relief is necessary; the question is how fast we implement it," said Mr Bush on Thursday, after a meeting in Austin, Texas with company executives.

Many economists agree, arguing that the 0.5% cut in interest rates by the US central bank on Wednesday cannot revive the economy on its own.

But the tax cuts are politically controversial, with a divided Congress, and it is unlikely to come into effect for at least a year.

Helping the real economy

There is also disagreement on whether the Fed action makes a tax cut more or less urgent.

"While financial markets can react instantaneously to changes in Fed policy, the real economy takes much longer, and the recent trends in the US economy are quite weak," said Robert Sinche of Citibank.

However, others pointed the important psychological effect on the stock markets and on consumer confidence of the Fed move.

"What it clearly does is to change the psychology on the markets. That is what he is aiming to do and so far it looks like he's been successful," said Jim O'Neill of Goldman Sachs.

Fresh Fed rate cut

On Thursday night, the Federal Reserve surprised the markets again by slipping in a surprise 0.25% cut in the discount rate, after the close of regular trading.

The Fed action pulled the psychology of investors out of the depth of depression and despair

Scott Bleier, Prime Charter Ltd

The largely symbolic discount rate, which it charges on direct loans to commercial banks, is now 5.5%.

The move came at the request of the 12 regional Fed banks who unanimously recommended the move.

"This is an amazing move by the Fed, for them to do this after hours is relatively shocking," said Art Hogan, analyst at Jefferies & Co.

The move will help reassure markets that the Fed intends to continue cutting interest rates.

The discount rate usually follows the more important Fed Funds rate down, but sometimes only after a delay.