Recession? Jobs Report Signals Stronger Economy

Weekly jobless claims for the second week appeared to defy the conclusion that conditions in the labor market are pointing to a recession.

Initial claims for the week ended Jan. 19 rose 1,000 to 302,000, well below the consensus estimate of 320,000. The four week moving average -- considered a more reliable measure -- was just under 315,000. Most economists consider 350,000 the dividing line between recession and growth.

"This number is certainly good," said Andrew Busch, foreign exchange strategist at BMO Capital Markets and a CNBC contributor, adding that the data underscores "that there is a huge debate over whether we are in a recession."

Worries about recession heightened three weeks ago when the government reported that the unemployment rate jumped three-tenths of one percent in December to five percent. That figure triggered alarms because it out the jobless level more than half a percent higher than its economic expansion low. A move of that size usually indicates a recession.

The spike in the jobless rate was accompanied by another extraordinary weak reading in job creation, which economists took as a sign businesses had turned cautious about the economy.

Following the data, Merrill Lynch and Goldman Sachs declared that a recession was imminent if not already underway.

Other recent data has been mixed, but one key closely watched recession gauge – industrial production – did not show a contraction in December. That led to some second-guessing among economists who were unsure recession was in the cards.

"The job market seems just fine, " said FAO Chief Economist Robert Brusca, one of the recession doubters. "Last week’s claims number was no fluke -- apparently. Now what?"

That is no small question, given the federal reserve’s dramatic three-quarter of one percent cut in the federal funds rate Tuesday and the growing likelihood of a massive fiscal stimulus package.

At the same time, the jobless data is unlikely to put an end to worries about the economy. Next week, the government reports nonfarm payroll data and the unemployment rate for January. Job growth is expected to be weak – about 50,000 versus 18,000 in the previous month. The jobless rate, however, is expected to remain at 5.0 percent.

"You’re seeing the psychological effect of the recession," JPMorgan Funds chief market strategist David Kelly told CNBC.

Kelly is no doubt referring to the theory that enough talk about a recession can in fact yield one – which has happened in the past.

The recent past may of more concern at the moment. The Fed’s surprise rate cut came a week before its regularly scheduled FOMC meeting Jan. 29-30, when economists expect it to cut rates somewhere between 25 and 50 basis points.

The current jobless claims "call into question the presumption that the economy is teetering on the brink of recession and consequently, the conclusion that the Fed must cut short term rates further," Nomura Internation Chief Economist David Resler wrote in a research note Thursday. "It also raises doubts about the need for a fiscal stimulus package aimed at boosting consumer spending....If the job market remains as vibrant as the most recent data indicate, fears of recession will recede quickly."