Slowdown may not slow Fed

[notiCIas]

Slowdown may not slow Fed

Weak manufacturing report doesn't mean central bank will pause; strong job growth seen.

June 1, 2005: 12:50 PM EDT
By Chris Isidore, CNN/Money senior writer
 
NEW YORK (CNN/Money) - A weak reading on manufacturing jolted financial markets Wednesday, but economists are holding to their view of a relatively strong employment report, due to be released Friday.

The Institute of Supply Management's survey showed the slowest growth in manufacturing in two years -- and that an 18-month hiring spree in the sector ended in May. The group also said the two-year-old expansion in manufacturing could end soon and its executives reported a big drop in inflationary pressures for goods purchased by businesses in the sector.

Stocks and bond prices both rose on the report, which raised hopes on Wall Street that the Federal Reserve would soon pause after raising interest rates at the last eight meetings of the central bank's policy-makers. The next Fed meeting is June 30.

But economists surveyed by Briefing.com forecast 175,000 new jobs were created in May, a solid gain, even if lower than the 274,000 people employers added to payrolls in April. The unemployment rate is expected to remain at 5.2 percent.

The April and May job growth is much stronger than gains seen during most of the current economic expansion, which started in November 2001, and not the type of job growth that generally would put the brakes on Fed rate hikes. And several economists interviewed Wednesday said they see no reason to back off their strong employment forecasts, even with the weaker ISM.

"We already were expecting a 5,000-job decline in manufacturing employment in May," said Steven Wieting, senior economist at Citigroup, who overall sees a 200,000 gain in employment. He said even if things are worse than he expected in manufacturing, there still can be strong job growth overall.

He also expects even the strong April jobs number to be revised higher.

"Keep in mind manufacturing employment peaked in 1979. Since then we've had a 40 percent increase in overall employment," he said.

Even Robert Brusca of FAO Economics, who believes the economy is going through a slowdown and that the Fed should stop raising rates, expects the kind of solid job growth projected by his colleagues.

"May generally has huge job gains," he said. "You can't look for a number less than 160, 000, and 180,000 may be more reasonable," he noted, adding there was a good chance of a much stronger number.

And Brusca, Wieting and others said stronger hiring should keep the Fed raising rates, at least another percentage point or more before it's done.

"I think at the Fed they believe we're getting near full employment. You've got unit labor costs going up," said Greg Valliere of Stanford Washington Research Group. "If we get a very strong jobs number, I don't totally rule out a 50-basis point (half of a percentage point) hike in June."

After the June 30 meeting the Fed doesn't meet again until Aug. 9, meaning there are two more jobs report that will come in between. Wieting said that even if the Fed does not raise rates in August, it does not mean it's done hiking rates.

"They were never going to have tightening every meeting this year," he said.