Fed move spurs only short-term job market optimism

By Joanne Morrison - Analysis

WASHINGTON (Reuters) - When U.S. Federal Reserve policy-makers meet next week, they are expected to again cut interest rates in an effort to prop up the economy, but analysts say such a move is not likely to boost job market optimism.

After the U.S. central bank lowered benchmark overnight rates in September by half a percentage point to 4.75 percent, more than half a million Americans entered the work force.

"Historically, you get most of the bang in the labor market in the first easing," said Anthony Chan, chief economist and managing director at JPMorgan Private Client Services in New York.

A surge of new entrants is typical in the month of an initial Fed rate cut. Similar surges were seen in January 2001, September 1998, June 1989 and October 1987 -- all months that coincided with the start of a monetary easing campaign.

These surges, ranging from 520,000 to over 700,000 new prospective workers, compare to average monthly gains well below 200,000 in the six months before and after the month in which the Fed first reduces borrowing costs.

But the boost that rate reductions give to the number of workers entering the labor force typically lasts for only a month, and analysts expect this will likely be the case this time as well.

Chan and others predict that the fresh burst of work-force optimism seen in September will fade quickly against a backdrop of a deteriorating housing sector and jittery credit markets.

"The bottom line is that it is almost always a one-time effect. Moving forward you are not going to get that much of a pop. That initial burst of optimism ends up giving way to more pessimism moving forward," Chan added.

Without the 573,000 people who entered the labor force last month, the unemployment rate most likely would have fallen slightly, as a government survey of households used to calculate the rate found 463,000 jobs were created. Instead, the jobless rate inched up to 4.7 percent from 4.6 percent.

A separate survey of nonfarm employers -- widely considered a more-accurate employment gauge -- showed the economy created 110,000 jobs last month.

CRACKS IN LABOR MARKET

Economists do see some cracks developing in the labor market and they expect sluggish job growth, at best, over the coming year as tighter credit generates more caution from consumers and businesses.

Rising defaults on U.S. subprime mortgages, which were extended to borrowers with checkered credit histories, sparked a sharp tightening in credit conditions in August as banks tried to assess who was on the hook for losses.

"So far, layoffs have not picked up outside of housing, and this is a key reason why the economy has not unraveled into recession," said Mark Zandi, chief economist at Moody's Economy.Com in West Chester, Pennsylvania.

"Businesses are on the edge, however, and could begin reducing payrolls if the financial turmoil flares up again or anything else goes wrong," he said.