Jobs decline, raising fears of recession
The notion that the U.S. is flirting with recession grew more credible Friday as the government reported that the economy shed jobs last month for the first time in four years, indicating that damage from the sub-prime mortgage meltdown had spread.
The news, which sent stock prices tumbling, came as two big mortgage lenders based in Southern California -- Countrywide Financial Corp. and IndyMac Bancorp Inc. -- said they planned to cut as many as 13,000 jobs.
The national job losses, which came as a surprise to economists, further boosted speculation that the Federal Reserve would cut interest rates to stave off an economic contraction.
Job rolls shrank by 4,000 -- their first outright decline since 2003 -- as manufacturing, construction and even school employment fell, leaving only healthcare and food services as major growth industries, the Labor Department reported.
The drop in payrolls was especially disturbing because economists on average had expected an increase of more than 100,000 positions and most of the job losses occurred before the worst of last month’s financial turmoil.
“It was a lousy report,” said Nigel Gault, chief U.S. economist at Global Insight, a forecasting firm in Lexington, Mass. “The news was bad everywhere you look.”
“It’s going to force people in Washington to ask, ‘Outside our models, what’s really going on out there?’ ” said John Silvia, chief economist at banking giant Wachovia Corp. “And what’s going on doesn’t look good.”
The August decline was accompanied by an 81,000-job downward revision in employment growth for June and July, suggesting that the economy had been weaker than previously thought for longer than previously thought.
The dismal data slammed stocks in the U.S. and Europe. The Dow Jones industrial average fell 249.97 points, or 1.9%, to close at 13,113.38.
Part of what made the report particularly unnerving was that Federal Reserve officials, including Chairman Ben S. Bernanke, had said the country’s financial problems, which began this summer in the sub-prime mortgage market, were largely confined to Wall Street and that the broader economy, though not robust, remained substantially unaffected.
“First, Bernanke said the sub-prime problem was going to remain sub-prime. Then . . . he said it was going to remain in the credit markets,” said David M. Jones, a Denver economic consultant and longtime Fed watcher. “Now you’re seeing that the credit crisis has spread to Main Street.”
The employment numbers set off a round of political sparring between Democratic presidential hopefuls and the Bush administration.
Sen. Hillary Rodham Clinton of New York, Sen. Barack Obama of Illinois and former Sen. John Edwards of North Carolina issued statements blasting the White House for what they labeled botched economic policies.
“The administration’s failure to lead while thousands of Americans found themselves in danger of losing their homes is now affecting the broader economy as thousands of workers lost their jobs,” Obama said.
Treasury Secretary Henry M. Paulson Jr. said in an interview that the August jobs figure was “not the kind of number I’d like to see,” but he predicted that the economy would continue to grow for the rest of the year.
Paulson and other administration officials cited as evidence of the economy’s fundamental soundness the fact that the unemployment rate remained unusually low at 4.6%.
But one factor behind the low rate was a sign of weakness, not strength: The labor force -- defined as the number of people working or looking for work -- dropped by 340,000 during the month, the Labor Department said.
The August job loss also prompted unusually direct calls by members of Congress for the Fed to provide support.
“A strong response is required -- specifically a meaningful interest rate cut,” said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. “The deeply troubling August employment report should end any debate about the action that the Federal Reserve board must take.”
“To ease or not to ease its key interest rate is no longer a question,” said Rep. Carolyn B. Maloney (D-N.Y.), chairwoman of the House subcommittee on financial institutions and consumer credit. “The question now is how soon and by how much.”
Jones, the veteran Fed watcher, said the demands for rate cuts were the most direct since the central bank and Congress clashed during the deep recession of the early 1980s.
The Fed has resisted cutting its benchmark federal funds rate, the interest rate at which banks make overnight loans to one another, in response to this summer’s financial upheavals. The rate has remained steady at 5.25% for more than a year.
Instead, the central bank has responded by injecting modest amounts of cash into the banking system and reducing the rate at which banks occasionally borrow from the Fed itself, known as the discount rate.
Until Friday, most analysts had forecast that the central bank would trim the fed funds rate by a quarter of a percentage point to 5% on Sept. 18, the next time it meets to review interest rates. But after the release of the jobs report, investment house Goldman, Sachs & Co. and others predicted a half-point cut.
Countrywide, the nation’s largest mortgage lender, said late Friday that it would slice its workforce by 10,000 to 12,000 jobs, or as much as 20% of its current total. Countrywide has been hit hard as turmoil over growing defaults on sub-prime loans -- those made to people with poor credit -- spread across the home loan sector and into other credit markets.
The 1,000 job cuts planned at IndyMac amount to 10% of that mortgage lender’s workforce.
Nationally, manufacturing, which had shown signs of strength in recent months, posted a decline of 46,000 jobs in August after slipping only 1,000 in July, according to government figures. Construction employment dropped by 22,000 after falling by 14,000 positions the previous month, a casualty of the slump in housing.
Unexpectedly, hiring by local governments in education, which usually goes up this time of year, fell by 32,000. Temporary help services, often an indicator of future hiring trends, was down by 13,200.
The only industries to show sustained growth last month were healthcare, up 35,000 for the month and 396,000 in the last year, and food services, up 24,000 for the month and 350,000 for the year.
Average hourly earning rose 5 cents to $17.50, and average weekly earnings climbed $1.69 to $591.50. Both were up 3.9% from a year earlier.
Gault, the Global Insight economist, said the Labor Department’s employment survey of businesses was conducted during the week of Aug. 12, as stock markets around the world were falling and credit was freezing up. That means the survey probably does not reflect the full extent of the damage inflicted by the market upheaval.
Although the employment data were gloomy, other recent economic data have been upbeat. Car sales and retail sales were surprisingly strong last month. And an index of activity in the services sector held steady for the month.
Still, the employment report raised the odds that the economy would slip into recession, noted Silvia, the Wachovia economist.
“Anyone looking at these numbers would have to say that the probability has gone up. There’s no other way to read them.”
