NY Times: US on verge of recession

2008-01-06

Richard Moore

³The risk of a vicious cycle setting in now is very high,²
Mr. Zandi said. ³The job market¹s operating at stall speed.
Either it picks up soon or it quickly unravels.²

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Original source URL:
http://www.nytimes.com/2008/01/05/business/05econ.html

January 5, 2008

Unemployment Sounds Warning About Economy
By PETER S. GOODMAN and MICHAEL M. GRYNBAUM

The unemployment rate surged to 5 percent in December as the economy added a 
meager 18,000 jobs, the smallest monthly increase in four years, the Labor 
Department reported on Friday.

Economists viewed the report as the most powerful indication to date that the 
United States could well be falling into a recessionary downturn. Evidence of 
widening unemployment heightened anticipation that the Federal Reserve would 
further cut interest rates this month, perhaps by an unusually large half a 
percentage point, in a bid to prevent the economy from sliding into the muck.

³This is unambiguously negative,² said Mark Zandi, chief economist at Moody¹s 
Economy.com. ³The economy is on the edge of recession, if we¹re not already 
engulfed in one.²

A recession is typically defined as an extended period of at least several 
months during which economic activity shrinks and unemployment rises.

The swift deterioration in the job market resonated as a warning sign that 
troubles once confined to real estate and construction are spilling into the 
broader economy, threatening the ability of American consumers to keep spending 
with customary abandon.

On Wall Street, the report led to a big sell-off that sent the Dow Jones 
industrial average plunging nearly 2 percent.

As the presidential race heated up, Democrats seized upon the bleak job numbers 
to indict Republican-led economic policies. ³This morning¹s jobs report confirms
what most Americans already knew,² Nancy Pelosi, the House speaker, said in a 
statement. ³President Bush¹s economic policies have failed our country¹s middle 
class.²

President Bush cautioned that ³we can¹t take economic growth for granted² and 
said he would work with Congress to be ³more diligent² on protecting the 
economy. Speaking to reporters at the White House after a meeting with his 
economic advisers, Mr. Bush warned that ³the worst thing the Congress could do 
is raise taxes on the American people.²

The lone consolation for investors, workers and the public at large was that the
bad news seemed severe enough to prod the Fed to push its benchmark rate below 
its current 4.25 percent when policy makers meet at the end of the month. Lower 
interest rates decrease borrowing costs and encourage banks to lend more freely,
spurring spending, hiring and investment.

The Fed has already eased rates three times since September in a bid to inject 
confidence into jittery markets. But analysts cautioned that central bankers may
now feel constrained against further easing: inflation is growing, particularly 
as oil hovers near $100 a barrel. Lower interest rates, over time, can generate 
the seeds of inflation, and could make an already weak dollar worth less against
foreign currencies.

³The Fed is trying to juggle a two-sided sword,² said Ryan Larson, senior equity
trader at Voyageur Asset Management. ³They¹re trying to fight inflation moving 
higher and they¹re trying to fight a slowdown in growth.²

In an effort to encourage lending, the Fed has been pumping cash through the 
banking system by auctioning off loans at discounted rates. On Friday, it said 
it would expand a pair of auctions scheduled for this month, offering $30 
billion.

Some economists said the markets and other analysts were making too much of a 
lone jobs report that could yet be revised.

³The stock and bond markets are going into panic mode,² said Michael Darda, 
chief economist at MKM Partners, a research and trading firm in Greenwich, Conn.
³We¹re going to have a slowdown, but I don¹t think we¹re going to have a 
recession.²

While filings for jobless benefits have been rising in recent weeks, the pace 
has not been swift enough to justify such a sharp jump in the unemployment rate,
Mr. Darda added.

For months, the economy had managed to grow vigorously despite worrying 
developments, from the unraveling of the housing industry to turmoil in the 
credit markets. Through it all, economists marveled at the resilience of the 
labor market, suggesting that as long as the economy kept creating jobs by the 
tens of thousands each month, Americans would keep spending and growth would 
carry on.

But the jobs report for December suggested that the negatives dogging the 
economy finally appear to be dragging it down.

³There¹s no mystery as to why the unemployment rate went up,² said Robert A. 
Barbera, chief economist at the research firm ITG. ³The mystery is why it took 
so long.²

December¹s addition of 18,000 jobs to nonfarm payrolls was an abrupt drop from 
the 115,000 created in November ‹ a figure revised on Friday from an initial 
estimate of 94,000. It put the annual rate of job growth at its lowest since 
2004.

Some areas of the economy continued to expand, according to the report. 
Government jobs grew, and health care added 28,000 jobs. Food services added 
27,000.

But that growth was largely reversed by pain elsewhere. Retailing lost 24,000 
jobs in December. Financial services lost 7,000. Construction shed another 
49,000 jobs. Even commercial construction, which some have suggested could 
compensate for woes among home builders, lost 17,000 jobs. Over all, private 
sector jobs slid by 13,000.

Despite a weak dollar, which has helped compensate for disappointment at home by
lifting American sales abroad, the nation shed 31,000 manufacturing jobs in 
December.

For the third consecutive month, wages grew slower than the pace of inflation, 
cutting into the real income of many workers. Among rank-and-file workers, who 
make up more than four-fifths of the labor force, average hourly earnings rose 
3.7 percent last year, below the 4.3 percent rise in 2006.

Job growth has been slowing steadily for two years. In 2005, the economy 
generated 212,000 new jobs a month, according to the Labor Department. Last 
year, the pace dropped to 122,000.

The spike in the unemployment rate, which was 4.7 percent in November, suggested
that the deterioration of the job market is now accelerating.

Last year, companies fretted about business prospects amid falling housing 
prices and tightening credit. Many stopped hiring, but large-scale layoffs were 
rare. But now, some appear to have concluded that they can no longer tough it 
out.

³December¹s bleak jobs report represents the siren call that this business cycle
is just about over,² declared Bernard Baumohl, managing director at the Economic
Outlook Group, in a note to clients. ³We¹re about to tilt over to the other side
of the economic curve and begin the downsizing.²

In Penacook, N.H., the tilt came during the Christmas season: Riverside 
Millwork, a supplier of windows, doors and stair parts, laid off 43 people. That
added to a wave of layoffs that has winnowed the staff from 225 to 40 since 
October 2005, when home building began its decline.

³We¹ve cut just about everything that we can possibly cut,² said Larry Byer, the
company¹s human resource manager. ³When you don¹t have assets to sell or to keep
you going, the bodies have to go.²

In calculating the rate of job growth, the Labor Department relies upon a 
sampling of payroll data and an extrapolation of how many jobs have been created
and destroyed. An accompanying survey of households, used to calculate the 
unemployment rate, presented an even bleaker picture, showing that the number of
Americans saying they were working plunged by 436,000 in December ‹ the worst 
number in five years.

The trend was pronounced for teenagers, blacks and Hispanics, with unemployment 
among those groups jumping 0.6 percentage point, triple the increase for whites.

The household survey is notoriously volatile and treated with skepticism. But 
unlike the payroll data, it is not subject to revision, other than for seasonal 
factors, making it a better indicator when the economy is on the cusp of change,
Mr. Barbera said.

Between December 2005 and December 2006, the household survey showed jobs 
increasing by 2.2 percent. Over the last year, jobs grew less than 0.2 percent.

³Every time we¹ve gotten down to this level since 1956, there¹s been a 
recession,² Mr. Barbera said.

The risk is that the weakening job market will swell from a symptom of malaise 
to a cause. As fewer jobs are created, spending power could dry up. Faced with 
declining business, employers could further trim payrolls. As unemployment 
grows, more homeowners could fall behind on mortgages, leading to more losses at
banks, and more layoffs.

³The risk of a vicious cycle setting in now is very high,² Mr. Zandi said. ³The 
job market¹s operating at stall speed. Either it picks up soon or it quickly 
unravels.²

Edmund L. Andrews contributed reporting.

Copyright 2008 The New York Times Company
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