Unemployment Increase Signals Cooling Economy

Unemployment climbed to 5.5 percent in March as factory jobs fell for the first time since 1993. The Clinton administration welcomed the development after a period of torrid growth, but the news rattled the stock market and raised recession worries among some economists.

Shortly after the Labor Department reported Friday that the jobless rate rose from 5.4 percent in February, stocks began to fall. By 2 p.m., the Dow Jones industrial index was down 35.96 points, but ended the session at 4,192.62, a 12.79 loss.

The Treasury’s benchmark 30-year bond was off as well, as investors worried about a new slide in the dollar, which set another record low against the Japanese yen.

“I think the stock market is probably worried about the possibility that this soft landing could turn into a hard landing,” suggested economist Sung Won Sohn of the Norwest Corp. in Minneapolis.

But many analysts focused on the creation of 203,000 jobs in March amid indications that wage inflation remained in check. Despite the job growth, the unemployment rate rose because more people entered the labor market than found jobs.

“We have hit a glide pattern that is bringing steady job growth without inflation at a relatively low level of unemployment,” said Labor Secretary Robert Reich. “We haven’t had this good a combination of job growth and non-inflation for several decades.”

Lynn Reaser, an economist with First Interstate Bancorp in Los Angeles, said the report and other economic indicators so far this year support “a soft-landing scenario,” in which the economy slows to a sustainable rate of growth that will relieve inflationary pressures.

Sohn, the Norwest economist, agreed the economy probably has reached a soft landing, but added, “There is a growing possibility of something more than that.”

Alan Davidson, president of Zeus Securities Inc. in Jericho, N.Y., was more emphatic. “We can kiss the soft landing goodbye,” he said. “Recession will start within the next six to nine months.”

A separate report from the Federal Reserve, meanwhile, added evidence the economy was slowing. It said consumer credit rose $8.2 billion in February, slower than the $9 billion pace a month earlier. Analysts maintain the growth rate in consumer credit appears to have peaked in November.

Although there were 203,000 payroll additions in March, the gain was far short of the 345,000 increase a month earlier and about 100,000 below the average of the prior 12 months.

Growth was curbed in part by manufacturing, which shed 4,000 jobs in the first decline since December 1993. The drop was widespread, although industrial machinery plants bucked the trend.

Factories had been adding more than 40,000 jobs a month from October through January, but the pace began to slow in February.

“It suggests the manufacturing sector, which had been booming, is starting to cool off,” contended Norman Robertson, an economics professor at Carnegie Mellon University in Pittsburgh.

Robertson and other economists agree the labor market slowdown is the result of seven Federal Reserve interest-rate increases, designed to cool the economy and keep inflation from overheating.

“The Fed’s medicine seems to be working,” said Stephen S. Roach, an economist with Morgan Stanley & Co. in New York. “The economy is slowing into a 2.5 percent growth range (from a 5.1 percent annual rate in the fourth quarter) and that is pretty much what the good doctor ordered.”

Retail businesses, including apparel and department stores, also saw payrolls fall by 9,000.

Analysts said the drop reflected slackening consumer demand as well as delayed hiring for the Easter shopping season because the holiday falls in April, rather than March.

The construction industry, much of which has been hammered by higher interest rates, posted an unexpected 58,000 gain, largest in four months. The government attributed the advance to unusually warm weather.

In addition to construction gains, service industries added 133,000 jobs, including the biggest increase in the health industry in a year.

Employment was also up in the finance, insurance and real estate industries, which had been suffering job losses since August.

The average work week was unchanged at 34.5 hours, but the average hourly earnings rose by three cents to $11.33.

Hourly earnings have increased by only 2.8 percent and weekly earnings by 2.5 percent over the last year, suggesting that labor costs remained moderate.