RIYADH, 10 May 2004 — Since March, global markets had been waiting with great anticipation for the April US job report. On it hinged, in their minds, the great unresolved mystery — when will the US Fed start to raise interest rates in the US and how aggressive will it be. The numbers released on Friday brings us closer to the date of reckoning. It disappointed financial markets in its strength, but the world certainly has something to cheer about, namely, the final nail in the coffin for a global recession that just doesn’t seem to want to go away (since March 2000).
According to the latest report by the US Labor Department on Friday, US job growth continued at a rapid pace in April, as 288,000 new jobs were created and the unemployment rate fell to 5.6 percent. The report was much stronger than the expected 172,000 increase and a 5.7 percent unemployment rate.
The Labor Department also revised upward the already stellar March’s payroll from 308,000 to 337,000 and February’s number was revised up from 46, 000 to 83, 000. Job growth, up eight months in a row, has averaged 217,000 a month so far in 2004. Since August, 1.1 million jobs have been created, thus putting a significant dent in the 2.5 million+ jobs lost during the recession.
The strong job report could bolster President George W. Bush since the economy was seen as his Achilles Heel. The market now has significantly advanced its interest rate forecasts. It expects the first rate hike as early as in June and as much as five quarter point moves by the end of the year. Federal funds futures now indicate a 92 percent chance of a rate hike in June, up from 48 percent Thursday.
The market sees the fed funds rate rising from 1 percent currently to 2.25 percent by the end of the year. Details of the job report show that jobs grew in 62 percent of the industries in April. The services sector added 246,000 jobs, and goods-producing industries added 42,000. Manufacturing employment, which showed a 21,000 increase, had been stagnant for almost 3 1/2 years until its first gain in February. There were other economic news this week that added to the sense of optimism about global recovery. Construction spending surged 1.5 percent in March compared to a consensus forecast of only 0.6 percent.
Nonfarm productivity rose 3.5 percent in the first quarter as expected contributing to the US GDP growth of 4.2 percent in the same period. And the ISM index has remained above the key 50-mark dividing the line between recession and recovery for eight straight months. The OECD’s “early warning indicator” for 30 advanced economies rose in March for its twelfth monthly rise. The Bank of England’s raised its key interest rate the second time by 25 bps on Thursday to 4.25 percent, signaling a strong UK economy. Five Japanese private research institutions put 1st quarter GDP growth between 1.6 to 4.5 percent on an annualized basis. The Japanese economy grew a revised 6.4 percent in the 4th quarter or 2003.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh)