‘Worst of layoffs may be behind us,’ economist predicts

Labor Department announces new claims for jobless benefits fell for third consecutive week

? The number of American workers filing new claims for jobless benefits dropped for a third straight week, suggesting the pace of layoffs is stabilizing.

Another report showed the economy was more sluggish at the beginning of 2003 than previously thought, but analysts still predicted a rebound later this year.

The latest batch of economic reports Thursday highlighted the country’s bumpy journey to full economic health. The layoffs report especially held out hope that the bruised labor market may be healing a bit, an encouraging sign for the economy’s revival, analysts said.

“The economy should gain traction in the second half of this year” as a fresh round of tax cuts and super-low short-term interest rates take hold and energize both business investment and consumer spending, said Mark Zandi, chief economist at Economy.com.

New claims for jobless benefits fell last week by a seasonally adjusted 22,000 to 404,000, a three-month low, the Labor Department reported. The more stable, four-week moving average of claims, which smooths out weekly fluctuations, dropped to a one-month low of 428,250 last week.

“The worst of the layoffs may be behind us,” said Mark Vitner, economist at Wachovia.

But companies probably won’t be in a rush to hire back workers. That means the nation’s unemployment rate at a nine-year high of 6.1 percent in May could creep up a notch to 6.2 percent in June, economists said. The government will release the employment report for June next week.

In a second report, the Commerce Department said gross domestic product grew at an annual rate of just 1.4 percent in the January-March quarter. That was slower than the 1.9 percent pace estimated for the first quarter a month ago and an initial estimate of a 1.6 percent growth rate.

GDP measures the total value of goods and services produced within the United States and is considered the broadest barometer of the economy’s health.

The mediocre 1.4 percent pace registered in the first quarter matched the economy’s growth rate posted in the final three months of 2002.

One of the major reasons behind the downward revision to economic growth in the first quarter was that business invested less their inventories during the quarter than estimated a month ago.

That resulted in a much larger drag on GDP, shaving off a sizable 0.82 percentage point from first quarter growth, compared with a 0.48 percentage-point reduction previously estimated.

Businesses, wanting profits to mend and facing lackluster customer demand, have been reluctant to crank up capital spending and hiring. Uncertainties related to the war in Iraq also had many companies putting off major business moves in the first quarter.

Because businesses kept inventories lean in the first quarter, they may spend more on replenishing them in the current April-June quarter, which could boost GDP, economists said.

Yet, lackluster growth for the second quarter is still being forecast, with estimates ranging from a 1 percent rate to just more than 2 percent. The government will release its first estimate on July 31.

Consumers, the main force keeping the economy going, increased their spending at a rate of 2 percent in the first quarter. That was the same as previously estimated a pace suggesting that shoppers remained cautious.

To nudge the recovery along, the Federal Reserve cut a key interest rate by a quarter percentage point Wednesday to a 45-year low of 1 percent.

Some economists are forecasting economic growth in the second half of this year in the range of a 3.5 percent to 4 percent rate.

With layoffs slowing, the stock market picking up and home sales booming, there’s reason for hope.

“There are small glimmers of optimism that the economy is coming out of its sluggish phase,” said Tim O’Neill, chief economist at Bank of Montreal. “It’s too early to declare victory over the sluggishness, but at least we’ve got some signs that we are winning the battle.”