Jobless Rate Hits 5.5%, Fueling Recession Fears : Economy: The unexpected July jump sent unemployment to its highest level in two years. Some analysts say the economic expansion may be over.
In the most visible sign yet that the economy is flirting with recession, the nation’s unemployment rate rose to 5.5% in July from 5.3% the previous month, while the private sector shed 45,000 jobs, the Labor Department reported Friday.
The unexpected increase in the jobless rate--to its highest level in two years--combined with fears of oil-fueled inflation in the wake of the Iraqi invasion of Kuwait, constituted a one-two punch that sent the nation’s financial markets reeling.
Convinced that the eight-year economic expansion is on the verge of stalling, traders rushed to unload stocks. The Dow Jones industrial average fell more than 120 points in midday trading before recovering somewhat to close down 54.95.
“This report is devastating,” said economist Irwin L. Kellner at Manufacturers Hanover in New York. He noted that the jobless figures were foreshadowed by last week’s report showing that the gross national product had grown at an annual rate of only 1.2% in the second quarter.
“Coming on the heels of the GNP report, and its decline in consumption and investment, this says the U.S. economy is already in recession,” Kellner said.
Other economists echoed Kellner’s gloomy assessment.
“The economy appears to be caving in to a full-fledged recession,” Allen Sinai, chief economist at Boston Co., told the Associated Press. “The jump in the unemployment rate is the telling sign.”
Richard Rahn, chief economist for the U.S. Chamber of Commerce, said the economy “is not going to hang on much longer. It is headed directly into a recession.”
“We’re close to the edge,” added Robert Dederick, chief economist at Northern Trust Co. of Chicago. “It wouldn’t take much of a breeze to push us over. . . . What’s going on in the Middle East may be the breeze to do it.”
The loss of 45,000 private-sector jobs were part of a huge overall job loss of 219,000, including 162,000 layoffs of temporary U.S. Census workers. The private-sector loss was the second in four months and far exceeded April’s weather-related contraction of 26,000.
The slumping construction industry lost 50,000 jobs, while manufacturing industries, which have shed 325,000 workers since a post-recession peak in March, 1989, lost 7,000.
Even the service sector, the primary engine of job creation during the past decade, gained only 14,000 jobs. Modest increases in retail trade and health services were offset by losses in business services and wholesale trade.
The jump in unemployment, which was larger than anticipated despite other signs of economic softness, was more pronounced in some sectors. Black unemployment jumped to 11.3% from 10.4%, while teen-age joblessness surged to 16.3% from 14.1%.
Many economic forecasters predicted that the recent 1.2% economic growth rate will decline to zero or even become a negative figure the remainder of the year.
Kellner, the Manufacturers Hanover economist, said the Federal Reserve Board should disregard potential energy price inflation and concentrate on “easing the blow” of a slumping domestic economy by allowing interest rates to fall.
The rise in the unemployment rate “ought to get the message across to the Fed,” Kellner said. “And if the Fed doesn’t get the message, Congress certainly will.”
However, economist Jerry Jordan of First Interstate Bancorp in Los Angeles said he believes that Fed Chairman Alan Greenspan is more likely to fight oil-induced inflation by maintaining or raising rates than to try to protect the economy from an economic contraction.
Jordan noted that when the Bureau of Labor Statistics reports on August employment next month, it also will unveil a large-scale revision of jobs data over the past several years, including new statistical classifications and updated pricing indexes.
The changes, Jordan said, will almost certainly reduce the number of newly created jobs in the reports, perhaps dramatically. For much of the past few years, the government’s surveys of business establishments have shown steady job creation of 250,000 or so each month--despite a sluggish economy that has added barely 1% per year to its output.
The reality seems to have caught up with the numbers, Jordan said, and the jobs once thought to have been created now appear to be disappearing.
“The chances are now 50-50 we’ll end up being told the economy has been in recession since last fall,” he said.
Roger Brinner, an analyst with DRI/McGraw Hill, a Lexington, Mass., forecasting firm, said he expects unemployment to rise as high as 6% by the end of the year.
Since the end of 1988, Brinner noted, non-farm private sector output has grown only about 0.6% a year. Yet overall unemployment had held at 5.3% until July, while payroll employment appeared to be growing steadily.
“That means we have an employment glut today, and we are beginning to get a needed correction,” Brinner said.
Unlike some economists, however, Brinner said the net loss of 7,000 factory jobs, after steady monthly declines of 20,000 or more, may suggest a bottoming out in the manufacturing sector.
“There are signs here the correction is coming slowly, and that’s good,” Brinner said. “The reduction in employment growth seems to be coming in measured doses, and it may be we can get through the year without panicking.”
The Bureau of Labor Statistics noted that most of the manufacturing job losses were in industries producing materials used in construction, while other industries, such as fabricated metals and textiles, showed job increases.
