Economists wonder when U.S. job machine will slow

WASHINGTON (Reuters) - The U.S. job market still looks healthy even though the world's richest economy has stumbled over the past few quarters, and economists wonder why the picture has not yet changed.

The economy created 455,000 nonfarm jobs over the first three months of the year, according to government data. If that rate were maintained, the United States would add a healthy 1.8 million new jobs over the course of the year.

While that would mark a slowdown from last year, when more than 2 million positions were added, economists say its a pace out of step with the sharp slowdown in economic growth.

"Job growth has an awful lot of momentum. We really don't know when it will slow down," said Kurt Karl, chief economist at Swiss Re in New York.

U.S. gross domestic product grew at a sluggish 1.3 percent annual rate in the first quarter, the weakest showing in four years, after three quarters in which it advanced, on average, at a moderate 2.4 percent pace.

Economists, and officials at the U.S. Federal Reserve, have been expecting the job market to cool as well, but so far growth in hours worked and employment has barely slowed.

A government report due on Friday is expected to show payroll growth did decelerate a bit in April. The median forecast of economists polled by Reuters is for a 100,000 job expansion in nonfarm payrolls. If the forecast proves accurate, it would be the weakest showing since January 2005.

Given softer employment growth, economists expect the jobless rate up to edge up to 4.5 percent after a surprise dip to 4.4 percent in March, marking only the slightest easing in what appears to be drum-tight labor-market conditions.

"It looks like the economy is still healthy outside of housing," said Gary Thayer, chief economist at A.G. Edwards & Sons.

SLOW GROWTH AHEAD

With recent increases in energy prices and the reduced spending power from housing and home equity wealth, the pace of economic growth this year is expected to be noticeably slower than in 2006, San Francisco Federal Reserve Bank President Janet Yellen said last week.

"If the economy is even more lackluster than before, why is the labor market still going gangbusters?" Yellen asked.

Yellen offered several hypotheses that could explain the apparent disconnect, including the possibility the jobless rate could overstate the tightness of the labor market.

"Measures of labor compensation do not all line up with tightness in labor markets," she said, pointing to the constrained 3 percent gain in employment costs over the past year.

Anthony Chan, chief economist at JPMorgan Private Client Services in New York, sees support for the view that the labor market may not be as tight as it first appears.

In a recent report, Chan noted the number of workers choosing to work part-time currently stands at the second-highest level in the last five economic expansions.

This pool of labor could be more heavily tapped if businesses sought to take on even more hires.

"Such evidence strongly suggests that a lot more slack exists within U.S. labor markets than implied by the latest unbelievably low 4.4 percent unemployment rate," Chan wrote.

In her speech, Yellen also pointed to a number of other possibilities that could explain the disconnect between sluggish economic growth and a solid job market.

She said the economy could be growing faster than official measurements suggest, or that underlying growth in the economy's productive capacity may have slowed, leading businesses to lean more heavily on their workers.

Some analysts say the disconnect likely reflects the fundamental health of the U.S. economy, which has retained some vigor outside of the housing and factory sectors.

"Basically the service side of the economy is doing pretty well," said Swiss Re's Karl.

Corporate profits remain strong and earnings are healthy, adding to the impetus of taking on new workers.

Many economists believe that, ultimately, a slackening in consumer spending and another quarter of slow growth will lead businesses to cut back on hiring, ending a long stretch in which firms were hesitant to let skilled workers go.

"Employers are reluctant to change until it hits them square between the eyes," said John Challenger, who heads the Chicago-based job outplacement firm Challenger, Gray & Christmas. "It does seem inevitable that unemployment is going to drift up."

While the jobs market is typically the last part of the economy to reflect slowing economic growth, economists say the length of the current lag is unusual.

"I think there might be some hoarding of skilled labor," said Mickey Levy, chief economist at Bank of America in New York. "Employment has just been rising too rapidly relative to the softening rate of growth."