[NYTr] Crashing Economy: Worsening Labor Market, Sinking Wall St.

[All the News That Doesn't Fit]

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International Herald Tribune - Jan 4, 2008
http://www.iht.com/articles/2008/01/04/business/usecon.php


U.S. labor market worsens, sinking Wall Street

By Peter S. Goodman and Michael M. Grynbaum

NEW YORK: The U.S. unemployment rate surged to 5 percent in December as
the nation added only 18,000 jobs, the smallest monthly increase in four
years, the Labor Department reported Friday. Economists absorbed the
report as the most powerful signal to date that the United States is
likely headed for recession.

"This is unambiguously negative," said Mark Zandi, chief economist at
Moody's Economy.com. "The economy is on the edge of recession, if we're
not already engulfed in one."

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

Wall Street read the report that way: It triggered a broad sell-off that
sent major stock indexes down more than 1 percent.

The lone consolation for investors and workers was that the bad news
seemed severe enough to force the Federal Reserve to again cut interest
rates when it convenes at the end of this month. Lower interest rates
decrease borrowing costs and encourage banks to lend more freely,
spurring investment, spending and hiring.

The Fed has eased rates three times since September in a bid to inject
confidence into jittery markets. But analysts cautioned that Fed
governors may now feel constraints against bringing rates further down:
Inflation is growing as a source of concern, particularly as oil hovers
near the symbolic $100-per-barrel level.

Lower interest rates generally increase inflation, and could make an
already weak dollar worth less against foreign currencies. That could
cause oil producers to demand even more dollars for their wares,
exacerbating inflation and constraining economic growth.

"The Fed is trying to juggle a two-sided sword," said Ryan Larson,
senior equity trader at Voyageur Asset Management. "They're trying to
fight inflation moving higher and they're trying to fight a slowdown in
growth," he said, adding: "The Fed is really between a rock and hard
place right now in terms ofwhat to do."

Much of the Fed's concern about the health of the economy centers upon a
severe shortage of credit: Spooked by mortgage losses and general
business uncertainty, banks around the world have gotten tight with
their dollars, choking off economic growth.

In an effort to break the logjam and spur the economy, the Fed has been
pumping cash through the banking system by auctioning off loans at
discounted rates. On Friday, in the wake of the disappointing jobs
report, the Fed said it would expand by 50 percent a pair of auctions
scheduled for later this month, offering up $30 billion.

For months, the economy has continued to grow vigorously despite a
string of worrying developments, from the unraveling of real estate to
the turmoil in mortgage markets. Through it all, economists have
marveled at the resilience of the labor market, suggesting that if the
economy can keep creating work and distributing wages, Americans will
maintain the wherewithal to spend, and growth will carry on.

But the December jobs report shot a considerable hole in that scenario,
economists said, heightening the likelihood of a recession. The myriad
negatives dogging the economy finally appear to be dragging it down.

"There's no mystery as to why the unemployment rate went up," said
Robert Barbera, chief economist at research firm ITG. "The mystery is
why it took so long."

The addition of 18,000 jobs to the December non-farm payrolls marked an
abrupt drop from the 115,000 created in November - a figure revised
Friday from an initial estimate of 94,000. It was well below the 70,000
jobs anticipated by economists, and it put the annual rate of job
growth at its lowest level since 2004.

Some areas of the economy continued to expand in December. The health
care sector added 28,000 jobs, and 381,000 for the year. Food services
generated 27,000 new jobs in December.

But that growth was largely overshadowed by the pain in other areas. The
retail sector lost 24,000 jobs in December in a disappointing holiday
shopping season. Construction shed 49,000 jobs for the month, and
financial services lost 7,000.

Despite the weak dollar, which has helped American exports and spawned
hopes that sales abroad might compensate for weak business at home,
31,000 manufacturing jobs were lost in December.

"The economy tanked in December," said Ellen Zentner, U.S.
macroeconomist at Bank of Tokyo-Mitsubishi. "Domestic demand has
slowed, so there's less need for companies to hire."

For the third straight month, wages grew more slowly than the pace of
inflation, meaning that many employees saw the value of their income
decrease.

Among rank-and-file workers, who make up more than four-fifths of the
work force, average hourly earnings rose 3.7 percent last year, below
the 4.3 percent rise in 2006. Wages stayed flat in December, witha
verage hourly earnings rising 0.4 percent, the same as November.

Job growth has been slowing steadily for two years. In 2006, the economy
added jobs at a rate of 1.68 percent per month, according to Labor
Department data. Last year, the growth rate slowed to about 1 percent.

But the unexpected jump in the unemployment rate, which was 4.7 percent
in November, suggested that the job market is now deteriorating more
swiftly. Last year, even as companies fretted about business conditions
amid falling housing prices and tightening credit, they largely held on
to their workers. They slowed hiring, but they did not start firing.

Now, many companies are seeing their stock prices battered, particularly
in banking and retailing. Falling house prices are crimping the ability
of homeowners to borrow - a brake on the consumer spending that amounts
to 70 percent of U.S. economic activity. Many companies have concluded
they can no longer tough it out and hope for better days: They are
feeling pressure to cut costs and slow production.

"December's bleak jobs report represents the siren call that this
business cycle is just about over," Bernard Baumohl, managing director
at the Economic Outlook Group, wrote in a note to clients. "We're about
to tilt over to the other side of the economic curve and begin the
downsizing."

The Labor Department relies upon a sampling of payroll data and its own
extrapolation of how many jobs have been created and destroyed in
calculating the unemployment rate, which increased from 4.7 percent in
November.

A second survey of households presented an even bleaker picture, showing
that the number of Americans employed plunged by 436,000 in December,
the worst showing in five years.

The household survey is notoriously volatile and thus treated with
skepticism by some economists. For months, some economists have cited
low official unemployment figures in dismissing an increasingly
distressing picture served up by the household survey.

But unlike the payroll data, the household survey is not subject to
revision other than for seasonal factors, making it a potentially better
indicator when the economy is on the cusp of marked change, said
Barbera. Moreover, the household survey captures self-employed people,
who often feel economic troubles earlier.

Between December 2005 and December 2006, the household survey showed,
the number of jobs increased by a total of 2.2 percent, Barbera said.
Yet between December 2006 and December 2007, employment grew by only
0.18 percent.

"That's striking," Barbera added. "Every time we've gotten down to this
level since 1956, there's been a recession."

The weakening jobs market, a symptom of an economic slowdown, could
itself add to the weight pulling the economy down. With fewer jobs
created and less spending power, Americans might trim their purchases,
taking more money out of the economy. Businesses from retailers to
restaurants to travel and leisure could then further trim payrolls in
response, and construction projects would be deferred or scrapped. More
people could fall behind on their mortgage payments, leading more
losses at banks, and more layoffs in the construction industry.

"The risk of a vicious cycle setting in now is very high," said Zandi.
"We're just at the beginning. The job market's operating at stall speed.
Either it picks up soon or it quickly unravels."