Unemployment rate falls to 5.6 percent

Saturday, February 2, 2002

WASHINGTON -- Nearly 1 million discouraged people suspended their job searches in January, producing an unexpected drop in the nation's unemployment rate.

Even though there are mounting signs of an economic recovery, economists believe the rate will rise again as cautious companies delay rehiring laid-off workers.

The jobless rate dipped to 5.6 percent, a 0.2-percentage-point decrease from December, the Labor Department reported Friday. But that occurred because the labor force shrank by 924,000 -- not because employment went up.

As a result, the government's official unemployment figure, which counts only those actively looking for jobs, fell to 7.9 million in January.

"People were so discouraged that they just stopped looking for a job and left the labor force, which is not a positive thing, and that understated the unemployment rate," said Stuart Hoffman, chief economist at PNC Financial Services Group. "It will take a while for the recovery to reach Main Street."

A lagging indicator

Economists said the unemployment rate, considered a lagging economic indicator, will resume rising in the months ahead. They predicted it would climb as high as 6.5 percent by June, hold steady for a while and then start to fall near the end of this year or at the beginning of 2003 as the economic recovery gains momentum.

The ailing economy, which fell into recession in March, has forced production cutbacks and thousands of layoffs and taken a big bite out of corporate profits.

"Companies are not going to commit to adding workers until their bottom lines stabilize," said Carl Tannenbaum, chief economist at LaSalle Bank/ABN AMRO.

On Wall Street, stocks retreated as investors collected their wins from a two-day rally. The Dow Jones industrial average closed down 12.74 points at 9,907.26.

Even discounting the statistical quirk which caused the jobless rate to fall, analysts said there were encouraging signs that the massive job losses seen after the Sept. 11 terror attacks are abating.

A separate survey of businesses showed that they cut their payrolls by 89,000 workers in January, an improvement from the 311,000 employees that were cut, on average, in October, November and December.

"After losing hundreds of thousands of jobs each month for the past four months, losing only 89,000 jobs in January is actually good news even if it doesn't feel that great," said Bill Cheney, chief economist at John Hancock.

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