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Friday's employment report could be breakthrough for U.S. job market

By Neil Irwin
Washington Post Staff Writer
Thursday, January 7, 2010; A13

As evidence mounts that the labor market is starting to improve, the most definitive sign of whether it's turned the corner could come Friday morning with the scheduled release of a closely watched employment report.

According to a survey of forecasters, the Labor Department report will show no net change in the number of payroll jobs, which would be the best result in two years. The national unemployment rate is expected to tick up to 10.1 percent in December from 10 percent. Some analysts are even projecting a small increase in total employment for the first time since December 2007.

These results will frame the political discussion in the weeks ahead about the Obama administration's performance in addressing the economic crisis, offering the most solid evidence yet of whether the nascent recovery is finally translating into gains for workers.

"It would be an important turn if we can go from an environment in which the jobs picture is worsening to one in which it is improving," said Dean Maki, chief U.S. economist at Barclays Capital, who forecasts the net creation of 25,000 jobs. "There will still be a long period in which unemployment will be high, but the economy has to start somewhere."

The pace of job losses appears to have been slowing down in recent weeks, as the number of people filing new claims for unemployment insurance benefits two weeks ago was the lowest since August 2008. And surveys of businesses are showing more willingness to hire -- or at least less desire to cut jobs. The Institute for Supply Management reported an improvement in its employment index in December, according to its survey of service businesses released Wednesday.

Also Wednesday, ADP, a payroll processing company, released its own report on the job market in December, finding that private employers cut jobs at the slowest rate since March 2008, resulting in 84,000 fewer U.S. jobs.

One worry for the labor market is that while employers appear not to be slashing jobs as quickly as they were earlier in the year, they haven't resumed hiring again. The economy must generate 125,000 or so jobs each month to keep up with population growth.

Top Federal Reserve officials noted that the improvement in the job market "mainly reflected a diminished pace of layoffs; few firms were hiring," according to minutes of their December policymaking meeting released Wednesday.

Analysts will be looking beyond the headline numbers in the Friday report, scouring the fine print for more evidence about whether the economic growth, which began over the summer, is now fueling an improved labor market.

A positive sign, for example, would be if the number of hours worked rises; employers have cut back on hours in response to the recession. Also, economists will watch for stronger gains in hourly earnings and the number of temporary jobs, both of which would presage more positive results in the future.

"I'll be looking for some of these telltale signs that tend to show up before the labor market bottoms," said Sung Won Sohn, an economist at California State University Channel Islands.

The employment results will also influence Federal Reserve policymaking, helping to determine how quickly the central bank scales back some of its efforts to prop up the economy. At their meeting a month ago, Fed officials saw a continuing expansion of the economy in December but were nervous about the strength and sustainability of the recovery, according to the minutes.

At that session, Fed officials left their target interest rate near zero and said they would wind down several unconventional lending programs in early 2010. While the Fed's program to buy $1.25 trillion in mortgage-backed securities is scheduled to wrap up by the end of March, the minutes suggested that it could resume later.

"A few members" of the committee "observed that it might become desirable at some point in the future to provide more policy stimulus by expanding" the scale and duration of those asset purchases, according to the minutes. But that view was hardly unanimous, and one member thought that they could be scaled back, or already-purchased assets sold off.

According to the minutes, the officials "expected the economic recovery to continue, but, consistent with experience following previous financial crises, most anticipated that the pickup in output and employment growth would be relatively slow relative to past recoveries from deep recessions."

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