Economy takes a double hit
Economists looking for signs of trouble found a double dose of it Friday, as unemployment surged and the price of crude oil soared to a record high. Stocks went into a tailspin, with the Dow Jones industrials plunging nearly 400 points.
First came news that the nation’s jobless rate shot up in May to 5.5% -- its highest level since 2004, and the largest one-month increase since 1986. That was followed by oil’s biggest one-day jump in history.
The employment report, showing a fifth straight month of job losses, bolstered fears that the country was in a recession, which some analysts recently suggested might be averted.
“At this point, if you look at the string of declines in employment, we’re in a borderline recession situation by any standard,” said Brian Bethune, an economist with forecasting firm Global Insight in Lexington, Mass.
Peter Morici, an economist at the University of Maryland, called the job report “the strongest evidence yet” that the economy “has slipped into a recession of uncertain depth and duration.”
In Washington, the dour unemployment report quickly became fodder for politicians, who expect the economy to dominate this year’s presidential campaign.
“This is a reminder that working families continue to bear the brunt of the failed Bush economic policies that John McCain wants to continue for another four years,” Sen. Barack Obama (D-Ill.) said in a statement.
Sen. John McCain (R-Ariz.) said, “We have to restore trust and confidence in government that we’re not having an out-of-control spending situation.” He went on to criticize Obama for favoring “the failed policies of the ‘60s and ‘70s.”
President Bush acknowledged the bad news but maintained that a surge of new job seekers was behind the report.
“This is a time of turbulence in the housing market and slow growth for our overall economy,” the president said in brief remarks at the swearing-in of Steven Preston, his new secretary of Housing and Urban Development. The president urged the remedies he usually suggests: increasing oil drilling offshore and in the Arctic, and permanently extending his first-term tax cuts.
On Capitol Hill, debate intensified over whether Democrats should once again try to extend benefits for the unemployed -- a measure Bush has vetoed in the past.
“We hope these numbers will cause the president to rethink his opposition to an extension of unemployment benefits,” Sen. Charles E. Schumer (D-N.Y.), chairman of Congress’ Joint Economic Committee, said as he opened a hearing on the employment numbers.
“Today’s jobs report is just another wake-up call for this administration to quit its threats to veto additional unemployment insurance for hard-hit workers and to actively work with Congress to address the more systemic problems dragging down our economy.”
Californians have been particularly affected by expiring unemployment benefits, with 1 million losing their payments in the last year, said Maurice Emsellem, policy co-director of the National Employment Law Project. “There’s every indication the situation will get much worse before it gets better,” Emsellem added.
In a further sign of strain on consumers, the Federal Reserve reported that consumer debt rose faster than expected in April, as many Americans apparently turned to credit cards to fund their everyday purchases.
In part two of the day’s bad news for Americans’ pocketbooks, the cost of crude oil soared, dashing hopes that fuel prices would subside and ease the strain they put on businesses and consumers. Oil futures jumped $10.75 in New York trading to an all-time high of $138.54 -- the biggest one-day gain on record.
The surge was blamed in part on an analyst’s prediction that oil would hit the $150-a-barrel mark by July 4.
“Oil just took off like a rocket,” said Phil Flynn, senior market analyst at Chicago-based Alaron Trading Corp.
The Dow tumbled 394.64 points, or 3.1%, to 12,209.81. The Standard & Poor’s 500-stock index, a benchmark for many index mutual funds held by individual investors, also sank 3.1%.
The sell-off exposed a deep vein of uncertainty running through the stock market. Investors, who had recently grown more sanguine about prospects for the economy, suddenly confronted the specter of extended job losses compounding the continuing effects of falling home values and soaring gasoline prices. Worries are growing that consumer spending will give way, denting corporate earnings and further pressuring stock prices.
Market analysts describe investors as confused, reacting wildly to each day’s economic news. On Thursday, the Dow jumped 214 points after a strong retail-sales report raised hopes that the economy was turning a corner.
For consumers, rising unemployment and higher gasoline prices, combined with Thursday’s news that the national home foreclosure rate had reached a record pace, formed a cruel trifecta.
In California, the average retail price of self-serve regular gasoline rose to a record $4.398 a gallon Friday, according to AAA. The nationwide average was $3.986, less than a penny lower than its record high set Thursday.
As for unemployment, some economists agreed with Bush that a larger-than-expected wave of entrants into the labor market -- primarily college and high school graduates -- appeared to swell the numbers of unemployed counted in May.
“These figures should be taken with a grain of salt, as school-leavers probably skewed them this month,” Joshua Shapiro, chief U.S. economist at economic forecasting firm MFR Inc., wrote in a note to subscribers.
But Morici of the University of Maryland said discouraged workers leaving the workforce more than outnumbered the young graduates jumping in.
Generally, economists said they were less impressed by the sudden jump in the unemployment rate than with the cumulative contraction in U.S. payrolls over the last five months, including May’s net loss of 49,000 jobs. The economy needs to create about 100,000 jobs a month just to keep pace with population growth.
Bethune of Global Insight said increases in the unemployment rate -- which is based on a phone survey of households -- tend to lag behind reductions in payroll jobs, which are tallied based on a survey of employers. In other words, the country’s job losses since the winter hadn’t been fully reflected in the jobless rate.
“We had been expecting that the shoe would drop,” Bethune said.
Economists said the job losses increased the likelihood that the economy was in a recession.
But Lee Ohanian, an economist at UCLA, said the economy had shown remarkable resilience in recent months. It appeared, he said, that increased efficiency in energy use has made the economy less vulnerable to higher oil prices. And despite job losses, consumer spending -- which accounts for two-thirds of economic activity -- has stayed strong.
“This is a really unique economic episode,” Ohanian said. “We have rapidly increasing oil prices, rapidly decreasing house prices and an increase in unemployment. But we still have healthy consumer spending and healthy productivity growth.
“Whether we go into a recession depends on which [set of] forces wins out. It’s really too early to tell.”
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walter.hamilton@latimes.com
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Reynolds reported from Washington, Hamilton from New York.
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Times staff writers Elizabeth Douglass and Terry McDermott in Los Angeles and James Gerstenzang in Washington contributed to this report.
