RIYADH, 7 June 2004 — A stronger-than-expected US job report, OPEC’s decision to raise oil production in the hopes of cooling record-high oil prices, and positive outlook from Intel, a technology bellwether, boosted hopes that the global economic recovery remains on a solid footing. Nonfarm employment data released by the US Department of Labor on Friday showed that the US economy added 248,000 jobs in May and the nation’s unemployment rate remained at 5.6 percent.
Markets had been expecting job creation of 220,000. The Labor Department also revised upward its numbers for April and March by a total of 74,000. Thus, in the past three months, the US economy has created nearly one million new jobs. So far in 2004, the recovery has seen the creation of about 1.2 million jobs, an average of 238,000 per month, after shedding 2.7 million jobs between March 2001 and August 2003.
This means that about 1.5 million lost jobs remain to be recovered, which would take about 6.3 months at the current average monthly rate. Republicans and Democrats both found something in these numbers.
The Bush administration took credit for the job gains, saying that it is their tax cuts that are boosting job growth. Democrats, on the other hand, said that not only more than half the jobs that were lost have to be recovered, but population has been growing in the meantime so that jobs have to be found for new entrants as well. Economists were focused on the impact of the report on the US Fed’s interest rate tightening policy.
Financial markets have already priced in a 25 bps hike on June 30, the next Fed meeting, and the latest job number was not spectacular enough to change that. Financial futures show only an 8 percent chance that the June interest rate increase would be a more aggressive 50 bps move.
With three months of solid job growth, analysts feel that the Fed has already shifted its focus away from it toward inflation data. Analysts say that unless core inflation picks up in May — the core Producer Price Index data for May will be released on June 11 — the Fed will stick to its policy of gradually raising rates in 25 bps over the next few months.
The other good news to hit markets was OPEC’s decision to raise output by 2.5 million barrels per day (bpd) by August. Saudi Arabia has also vowed not to let oil prices remain so high, after it reached a record $42.45 per barrel in the New York market last week.
Economists are afraid that high oil prices can hurt economic recovery in heavily oil-import dependent Japan and Europe and also choke off growth in the emerging economies of China, India and the Far East. OPEC’s decision, however, had a muted effect on oil prices — they still remain far above its preferred high of $28 per barrel and the peak summer driving season in the US is ahead.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh)
