US job market improves

The US job-creation machine kept cranking during the mid-year credit squeeze -- despite fears of a stall a month ago -- prompting analysts to once again tear up their forecasts for the US economy.

Friday's Labor Department report on nonfarm payrolls showed 110,000 new jobs created in September.

But the big surprise was the revision to the estimate in August: the government now estimates a gain of 89,000 jobs, instead of a net loss of 4,000.

Just as last month's data had stunned analysts and fanned fears about a downturn, the revision has prompted economists to upgrade their forecasts.

"Oops, they did it again," economist Avery Shenfeld at CIBC World Markets said of the hefty revision.

"Remember that ominous payrolls decline for August? It now shows up as a gain of 89,000. So as far as being in recession already -- nevermind."

The big revision for August was nearly all in local education, which the Bureau of Labor Statistics says can be "volatile" in the summer and had a small survey response.

Shenfeld said he is now redrafting his outlook based on the jobs report, seen as one of the most reliable gauges of economic momentum.

"We had been giving thought to a downward revision to our just-under-1.0 percent real growth forecast for the fourth quarter," he said.

"But this revised picture of the labor market suggests that even with weakness in industrial orders and housing, there will be some support for growth from consumers."

Last month's original report showing the first drop in overall employment in four years was seen as a factor in the Federal Reserve's decision on September 18 to slash key interest rates by half a percentage point.

Now after the revision, the Fed faces a fresh conundrum on whether to cut rates further, or wait until they see if the economy pulls out of a soft patch on its own.

"Would (Fed chairman) Ben Bernanke and the crew at the Federal Open Market Committee cut rates 50 basis points without a negative print on the jobs? I seriously doubt it," said Andrew Busch, an analyst at BMO Capital Markets.

Busch and others said there are now doubts about future rate cuts, especially as credit markets appear to be returning to normal.

"Further rate cuts are now significantly in doubt," said Stephen Gallagher, an economist at Societe Generale.

"In as much as the Fed reacted to the one number, the move may have been an overreaction. The Fed will remain very sensitive to financing conditions, but any additional rate cuts are now in jeopardy."

Robert MacIntosh, a chief economist for Eaton Vance, said the revised data suggests the central bank may have erred in easing rates so much.

"It means the Fed probably shouldn't have done what they did, that they should have waited," MacIntosh said.

"Those of us who were skeptical at the time now feel a little redeemed."

MacIntosh said the latest data is consistent with economic growth in the two to three percent range, above the level of one to two percent most had estimated ahead of the latest data.

"The economy's doing fine despite all the housing headlines," he said.

Others say the report paints a picture of an economy that is sluggish and still faces risks. Some say the economy needs to create 100,000 to 150,000 new jobs each month just to absorb new labor market entrants.

"The recent pace of job growth is insufficient to prevent the unemployment rate from increasing further," said Robert DiClemente, an economist at Citigroup.

The figures "reveal a clear softening in underlying labor market conditions that likely will reinforce the current moderate economic growth track."

Economist Nigel Gault at Global Insight said he still expects the Fed to cut rates by another half-point, but the timing is less clear now.

"Our underlying view of the economy remains unchanged," he said.

"Output growth is slowing, employment growth is slowing, and the Fed will need to cut interest rates further ... But whether the next rate cut will come as soon as (the next Fed meeting) October 31 is now in question."