Joblessness Hits 7.8%; Fed Reduces Key Interest Rates : Economy: Unemployment surges to 9.5% in California, signaling the recovery may be slipping. Major banks trim prime to 6%, lowest in two decades.

By JAMES RISEN

July 3, 1992 12 AM PT

TIMES STAFF WRITER

WASHINGTON —

In a dramatic sign that the economic recovery may be faltering in the midst of a presidential election campaign, unemployment surged in June to recessionary highs of 7.8% nationally and 9.5% in California, the government reported Thursday.

The Federal Reserve Board immediately responded to the worst U.S. jobless figures in more than eight years by slashing its benchmark discount rate--the interest it charges on loans to private banks--by half a percentage point to 3%, the lowest level since 1963.

The Fed also reduced the federal funds rate--the interest on loans that banks make to each other--by half a point to 3.25%. Major commercial banks, in turn, cut their prime lending rates to 6%, the lowest level in nearly two decades.

The interest-rate reductions are designed to stimulate the economy by encouraging consumers and businesses to borrow and spend more freely. Since the recession began in mid-1990, the Fed has lowered the discount rate by a total of 4 percentage points.

Within hours of the unemployment report, both houses of Congress approved another extension of jobless benefits for victims of the lingering recession. President Bush promised to sign the measure, which gives workers who exhaust their regular six months of benefits an additional 20 or 26 weeks of assistance. Californians will qualify for 26 weeks.

Economists, startled by the surge in unemployment and other indications of economic weakness, said that it is unclear whether the Fed’s rate cuts will be sufficient to prevent a renewed slump before the November election. Some cited the possibility of a triple-dip recession, with a fledgling recovery stalling out for the second time in less than a year.

“The economy is still stuck in a swamp,” said Robert Dederick, an economist with Northern Trust Co. in Chicago.

Thursday’s action by the Fed marked the seventh time since the recession began in the summer of 1990 that it has cut the discount rate. But the series of rate cuts has failed to fully revive the economy.

Analysts attribute the lackluster response in part to structural problems that have made the 1990-92 recession unlike any other in the post-World War II era. Long-term obstacles to growth--including the reluctance of banks to make new loans, dramatic reductions in defense spending, heavy consumer and corporate debt burdens, and declining economic productivity--have curbed the economy’s ability to respond to lower interest rates.

Bush, who has stepped up pressure on the central bank in recent days to reduce interest rates, applauded the Fed’s effort to keep the economy from slipping back into recession. He conceded, however, that the nation’s unemployment rate, now at its highest level since March, 1984, “is not good news.”

The Labor Department said that the June jobless rates, up from May figures of 7.5% nationally and 8.7% in California, reflect the combined effect of additional job reductions by employers and the sudden entry into the labor force of thousands of hopeful new job seekers.

The department’s monthly survey of American households showed that 9.98 million workers were unemployed in June, the largest number since October, 1983. The U.S. labor force soared to 127.5 million as high school and college graduates flooded the job market.

A separate Labor Department survey of employers showed that 117,000 payroll jobs were eliminated last month. The biggest decline was in the nation’s factories, which shed 58,000 jobs. The losses startled economists, who had predicted that payroll employment would rise.

The surge in joblessness reflected layoffs in every major sector of the economy except government, bringing to an end a four-month period of relative employment stability. Worsening the outlook, the June report did not take into account a series of big layoffs announced in recent days by Hughes Aircraft and several other major corporations.

In a separate report, the Labor Department said that the number of Americans filing new claims for unemployment benefits fell only slightly during the third week in June, after posting a sharp increase the previous week. In yet another sign of weakness, the Commerce Department said that orders to U.S. factories fell 0.8% in May, the first such decline in five months.

The spate of statistics caused bond prices to soar, as yields on short-term Treasury bills fell to their lowest level in 20 years. Stock prices sagged, however, as traders pondered the possibility of a renewed recession.

Pressed to say who was at fault for the sluggish economy, Bush told reporters: “Hell, I’ll take my share of the blame.”

But the President reacted testily to a suggestion that he has failed to grasp the magnitude of the nation’s continuing economic problems, seeking to shift the focus to Congress.

“I get it,” he said. “I said these numbers are not good but I’ve got an answer for it.” He said that Congress should reconsider a package of Administration proposals, introduced last March, that the White House contends would promote economic growth.

Arkansas Gov. Bill Clinton, the presumptive Democratic presidential nominee, said that the June figures underscore the failure of the Bush Administration to take bold action to help Americans hurt by the nation’s economic woes.

“Now, as the number of unemployed Americans nears a staggering 10 million, it is clear that we can’t afford another four years of wait-and-see, do-nothing economics,” Clinton said in a statement. “We can’t afford a President who is willing to do anything to keep his job, but nothing to help average, hard-working Americans keep theirs.”

Several analysts said that upcoming government reports are likely to show that economic growth fell to an annual rate of 1.5% or less in the second quarter, following a more rapid 2.7% pace in the first three months of the year.

When voters go to the polls in November, they noted, the economy is likely to look much weaker than previously expected.

“The recovery is still alive, but it is sick and it is certainly not healthy enough for George Bush to be happy about his job prospects,” said David Wyss, an economist with DRI-McGraw Hill, a Lexington, Mass., economic forecasting firm. “In November, unemployment is almost certainly going to still be above 7%, and people are not going to be happy when they go into the voting booth.”

In fact, a report issued earlier this week showed that consumer confidence, a key indicator of the nation’s mood, is beginning to slip again as the recovery loses steam. The Conference Board, a private business group, said this week that its measure of consumer expectations for the months ahead fell in June from the level posted in May.

Fed officials, who normally try to gauge the economy’s direction by watching the impact of interest-rate cuts on the growth in the nation’s money supply, have watched with increasing puzzlement as their key barometer has failed to respond to continued rate reductions.

“The Fed doesn’t have a good handle on what’s happening,” said one former Fed official, who asked not to be named.

The pressure on the Fed has been particularly intense because the federal deficit has paralyzed tax and budget policy, making it virtually impossible for Congress or the White House to push through a major package of anti-recessionary tax cuts or spending hikes.

As a result, the central bank’s control over interest rates is virtually the only tool available to the government to deal with the nation’s economic woes. Economists say this is the first prolonged slump in recent history in which Washington has been unable to stimulate growth by boosting federal spending.

Times staff writers Douglas Jehl and William J. Eaton contributed to this story.