[NYTr] Could a recession lie ahead? - Uhhh - Ya Think?

Mon Sep 10 16:10:36 EDT 2007

sent by tsimonds (activ-l)

The Christian Science Monitorv- Sep 10, 2007
http://www.csmonitor.com/2007/0910/p01s02-usec.html

Could a recession lie ahead? Watch the job market.

The US economy lost 4,000 jobs in August. 
Home builders, factories, and schools were hit hard.

By Mark Trumbull

The latest snapshot of American employment showed the first monthly
decline in four years, but the worst part is this: The numbers suggest a
steady weakening of the job market, not just an August dive.

Factories, home builders, and public schools all saw big employment
losses in August, yielding a net loss of 4,000 jobs for the nation. But
what's more troubling than the negative tally, economists say, is the
breadth of deceleration.

Job creation in the service sector, where most US jobs are, has been
cooling  from food services to professional occupations. Healthcare is
one notable exception.

"I don't think it's a one-month number," says John Silvia, chief
economist at Wachovia Corp. in Charlotte, N.C. "Businesses are
expecting some slowdown in the economy, and they're reacting to it by
not hiring people."

Meanwhile, consumer spending has been growing more slowly, too.

These patterns raise the risk of a kind of self-fulfilling prophecy. If
economic uncertainty is prompting businesses to postpone hiring, and
consumers to postpone purchases, a recession becomes much more probable.

Economists generally foresee tepid growth not an outright contraction of
economic activity. But what happens to the job market in the next couple
of months could determine the answer to that question.

The heightened threat of recession could prompt the Federal Reserve's
policy committee to take stronger action to buoy the economy when it
meets next week.

It may cut its target for short-term interest rates by half a percentage
point, rather than a quarter point.

"It's a very different ball- game," says Mr. Silvia. "Here you don't
have a lot of margin for error."

He points to three numbers as signs of the job-market downshift. In the
most recent 12 months, the economy on average has created 133,000 jobs a
month. But for the most recent six months, that average has slipped to
103,000. And the average net job gain in the past three months has been
just 44,000.

If that three-month total slips into negative territory in the months
ahead, that would probably indicate a recession. In 2001, the Labor
Department's three-month tally of net job gains veered below zero in
April, as that year's recession was just beginning.

(The timing of recessions is declared after the fact by a committee of
economists.)

Even one negative month is a bad sign. After all, that hasn't happened
since 2003, when the economy was still finding its footing from the
previous recession.

But monthly numbers fluctuate widely. And the initial number always gets
revised. That's why it's the overall pattern, such as three-month
totals, that's key.

"This is a trend" of deceleration, says Rajeev Dhawan, director of
Georgia State University's Economic Forecasting Center in Atlanta.

The reasons: A protracted housing slump is affecting many homeowners,
realtors, home builders, and the mortgage industry. The automotive
industry is undergoing major restructuring. And in the past month, Wall
Street firms that thrive on lending or borrowing are feeling the pinch
of tighter credit conditions as investors scrutinize default risks.

More broadly, the chief executives who control much of the nation's
hiring have grown less confident, Mr. Dhawan says. "It becomes a case
of who's going to move first" and hire, he says. "When nobody moves, it
becomes a slowdown."

Most sectors of the economy have been expanding their employment this
year even in August. But the pace in many industries is cooling. This
reflects slowness to hire more than outright layoffs.

Even in the growing food-services sector, however, some businesses are
downsizing.

Mino Settepani, who owns a New York City bakery, says he has cut six
positions in the past three years. As costs have risen for milk, eggs,
and gas, some of his bread and pastry business became unprofitable.

Not far away, Alberto Ramirez says he looked for work for three months
before finding employment this year at the San Marco Pizzeria. "They
usually say they aren't hiring," he says as he makes some pizza dough.

America must add some jobs each month just to keep pace with the arrival
of new people in the workforce.

In the current economic expansion, the unemployment rate has remained
low, and it was unchanged in August at 4.6 percent.

But economists expect that rate to rise unless job creation picks up.

James O'Sullivan, an economist at the investment bank UBS, says the big
risk is if credit-market turmoil causes a wider loss of confidence.
"Such weakening can become self-perpetuating, with weaker spending
leading to weaker employment leading to weaker spending, and so on," he
wrote Friday in a report to clients.

But there's nothing inevitable about this potential spiral, he adds.
During a global crisis in 1998, business confidence bounced back after
the Fed cut interest rates.

"We're at the cusp where it can go either way," Dhawan says.

He sees a 25 percent chance of recession. His brighter scenario is a few
months of poor job creation, and then a rebound as the credit squeeze
eases. Despite the housing downturn, he says most US consumers "are
still pretty healthy."

[Nicole Hill contributed to this story from New York.]