WASHINGTON The U.S. economy's prospects seemed less gloomy after an unexpectedly robust employment report and some reassuring words from federal reserve officials last week, though analysts warned the outlook was not entirely rosy.

The Labor Department said on Friday that 135,000 new jobs were created in February -- more than had been expected -- on top of 224,000 in January, while U.S. Central Bank officials took pains to predict a second-half rebound from a current bout of sluggish expansion.

This has led many private-sector analysts to conclude the risks of a recession, in which gross domestic product or national output contracts for two running quarters, were easing, especially with the fed expected to cut interest rates again in a little over a week.

"The most likely course is a growth recession, or profits recession, which is a prolonged period of below-potential GDP growth in which the unemployment rate increases and profit margins get squeezed," said economist Mark Vitner of first union corp. In Charlotte, N.C.

Worry had been mounting that the record expansion begun when the last recession ended in March 1991 might be coming to an end. While the economy has clearly slowed, analysts said the February jobs report indicated that aside from the hard-hit manufacturing sector, which shed another 94,000 jobs last month, there was still some room to run.

Atlanta fed President Jack Guynn, speaking in new Orleans on Saturday night, joined a string of officials indicating that pessimism about the economy was overdone.

"Yes, we are currently working our way through some temporary imbalances that are painful to some industries, companies, employees and investors," Guynn said in remarks prepared for the money watch live 2001 conference.

"But the fundamentals of the U.S. economy remain in very good shape." He added that he expected economic growth will pick up speed to "at least" a moderate pace later this year.

..................Fears of Stall Ease...............

Few analysts saw the economy leaping back into full gallop right away, but at least it seemed less likely to stall.

"We are revising up our first-quarter gdp estimate. Which we had at zero, to growth something above zero," Vitner said, adding that goods and services output likely will grow at around a 1 percent annual rate.

By contrast a year earlier in the first quarter of 2000, GDP raced ahead at a 4.8 percent clip, accelerating to 5.6 percent in the second quarter before slowing to a 2.2 percent rate in the third quarter and to 1.1 percent in the final three months of the year.

The economy's potential growth rate -- the pace at which it can safely expand without generating inflation or causing jobs to be lost -- likely is around 3 to 3-1/2 percent a year currently, Vitner estimated.

Financial markets, shaken by profit worries and fearing the February jobs report meant smaller or fewer interest-rate trims ahead, dropped sharply on Friday.

Weak stock prices in recent weeks together with a manufacturing recession that is causing companies to shed thousands of jobs had led to speculation that the fed might slash rates by as much as three-quarters of a percentage point at its march 20 policy meeting.

But the latest jobs data made such a big cut look unlikely.

Economist Paul Kasriel of Northern Trust Co. in Chicago said he still thought a half percentage point reduction in key lending rates will be announced by the fed, but no more.

..................Still Ample Risks Ahead..................

"While things may not be quite as bad today as the general perception had been before today, the economy is still growing weakly and faces a number of vulnerabilities," he said.

Kasriel said he expected first-quarter growth to edge ahead at a 0.75 percentage point annual rate, picking up to 2-1/4 percent in the second quarter. "I think the data we are seeing now would suggest we are not in a recession now and with the fed lowering rates I would have to say we're not as close to one as people had thought," he added.

Both Kasriel and Vitner said they foresaw further rate cuts at subsequent meetings of the policy-setting federal open market committee after March 20, though possibly not as large as the two half percentage cuts announced in January and the matching one that is anticipated next week.

The fed itself was sending messages that it felt some modest optimism. Both New York Fed President William Mcdonough and Chicago Fed Chief Michael Moskow played down recession worries in separate speeches on Thursday.

"I think the question is what is the first quarter likely to be, which is fairly likely to be quite weak, probably slightly positive," Mcdonough told reporters in London after delivering a speech to the British Bankers Association.

Moskow, speaking to reporters after a speaking engagement in Illinois, said risks were tilted toward slower growth but, "I don't personally think we're in a recession at this time."

The FOMC includes a statement about risks facing the economy after each policy session, and Moskow's comments echoed the wording policymakers use when they want to signal they remain ready to trim rates if necessary.

In Rome on Friday, fed Vice Chairman Roger Ferguson said he expected "a normal slowdown" in first-quarter economic activity and after that, "I would expect to see a gradual pickup."

But Ferguson cautioned that it's too early to call a bottom. "There are signs that may suggest some strengthening and signs that suggest the risk is still to the downside, so we have to fairly cautious in calling anything prematurely."

(Reuter)