Job Report Puts Ball in Consumers' Court

WASHINGTON _ The difference between a soft landing and a recession is now in the hands of American consumers.

That's the inescapable conclusion after the Labor Department reported Friday that the U.S. economy shed 101,000 jobs during May. It was the largest monthly loss in more than four years and followed a decline in the April job total as well.

If Americans see their relatives and neighbors heading for the unemployment lines _ or end up there themselves _ they're likely to put the brakes on spending even harder during the second half, sending the economy into a tailspin.

It's a classic case of the anecdote driving perception.

"Try telling all the people who are losing their jobs we're not going to have a recession," said former Treasury Secretary William Simon, who served during the Nixon and Ford administrations.

Conversely, if consumer are wooed back into the housing market by the big drop in mortgage rates, their spending could spur a second-half rebound. A surge in long-delayed income tax refunds could also play a part.

"After a slow start, refunds accelerated in May and wound up $8 billion higher than last year," said analysts at Merrill Lynch

Co.'s fixed-income research department. "The checks that consumers received at the end of May should be spent during June. If not, then a more prolonged slowing is in store."

For economists, trying to gauge these changes in consumer sentiment is no simple task. "We're still trying to figure out what drives consumer action," said Gene Sherman, research director at M.A. Schapiro Co. in New York.

There are indicators that purport to capture how consumers are feeling about the economy _ and presumably, what they're likely to do in the future. Unlike reports from the government, though, they don't directly measure things like jobs lost or durable goods manufactured.

Instead, they're subjective measures that analysts said are best taken with a grain of salt. After all, "the guy on the street doesn't know" about general business conditions, said Raymond Stone, a managing director of Stone McCarthy Research Associates in Princeton, New Jersey.

Even as the labor situation weakened in May, for example, the Conference Board's index of consumer confidence dipped only slightly, to 101.6, from 104.6 in April. That's still the third highest monthly reading of the current expansion.

Moreover, consumers' expectations of future conditions often are changed by political or global events that aren't directly tied to the U.S. economy.

Tim McGee, chief economist at Tokai Bank in New York, said it's possible the prospect of U.S. troops in Bosnia could tip the balance against a resurgence in consumer spending.

"One way a soft landing turns into a hard landing is some sort of war situation, which is what happened" during the Gulf War, he said. "It impacts on consumer confidence."

Analysts said it's better to look for the long-term trend in consumer-driven indicators. "When there's a significant drop in confidence, it's almost always associated with a giveback in the economy," said Stone.

One thing seems clear: consumers aren't likely to head for the mall unless they've got some cash to spare.

"When personal income starts to deteriorate, consumers stop spending," said Sherman. "That's the natural flow of things."

On that score, the employment report provided a worrisome warning. It showed average weekly earnings dropped $4.11 in May, to $390.33. And a day earlier, the government said gains in personal income and spending in April didn't even keep pace with inflation.

When Americans put away their wallets, businesses eventually begin paring production and cutting their workforces. That boosts unemployment, leading to more consumer angst, and possibly spiraling the economy into a recession.

That's what some analysts were predicting after the ominous jobs report.

"This is an outright stop. The odds of a recession are not minuscule now," said Robert Dederick, an economic consultant to the Northern Trust Co. in Chicago.

Other analysts, however, are predicting better times for the second half of the year. Using a separate survey method, the government found that unemployment actually declined slightly last month, to 5.7 percent from 5.8 percent in April.

True, that reflects in part a decline in the number of job seekers. It still comes at a time of borrowing costs are down, and may move lower if the Federal Reserve cuts the overnight bank lending rate next month as many analysts expect. That could well put Americans in the mood to spend again.

"Lower interest rates haven't yet generated increases in activity, but they will," said Russell Sheldon, an economist with Mellon Bank in Pittsburgh. "There have been a lot of capital gains in the stock and bond markets, and it's highincome people who buy houses."

Mortgage rates have been moving lower since Christmas, when they set a recent peak of 9.25 percent. This week, the average rate on a 30-year fixed-mortgage averaged 7.71 percent, the lowest since March 11, 1994.

Stepped-up spending would pare the inventory of excess homes and consumer goods that is keeping manufacturers on hold, analysts said. That may already be happening. Most of the nation's leading department and discount stores reported May sales increases in stores open at least a year.

On Monday, the Commerce Department reports on houses completed during April. Completions rose 9.8 percent in March.

Tuesday, the Commerce Department issues figures on wholesale trade during April, which analysts said likely increased 0.5 percent following a 1.0 percent decline during March.

The Federal Reserve reports Wednesday on April consumer credit. Analysts said consumers likely increased their credit by $10.1 billion during the month.

On Thursday, the Labor Department issues its weekly report on initial jobless claims. Claims increased by 9,000 to 389,000 last week, the highest level in 16 months.

The Labor Department will report Friday on May producer prices. In April, the producer price index rose by 0.5 percent.

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