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Around the Street: Labor Pains Worsen

Another haymaker to the economy: Friday's jobs report showed the highest unemployment rate in nearly 15 years. Economic experts weigh in

Confirming Wall Street's fears, the U.S. employment report for October, released Nov. 7, showed a worse-than-expected pace of job losses for the U.S. economy. Nonfarm payrolls plunged 240,000, vs. market expectations of a 190,000 drop. The unemployment rate jumped to 6.5% in October from 6.1% in September; that's the highest reading since March 1994. The report, accompanied by downbeat data on business inventories for September and chain-store sales, comes as President-elect Barack Obama gathers advisers in Washington to craft an economic strategy for when he takes office in January.

BusinessWeek and S&P MarketScope staff compiled insights on the data—and other key economic topics—from economists and market strategists on Nov. 7.

David Greenlaw, Morgan Stanley (MS)

The nonfarm payroll report was much weaker than expected, with a steep decline in October payrolls (-240,000), combined with large downward revisions to September (-284,000) and August (-127,000), and a sharp rise in the unemployment rate to 6.5% from 6.1%. Job loss in October was broadly based, with sectors such as manufacturing, construction, retail trade, and temp help posting the largest declines.

This report is likely to influence the fiscal stimulus debate in Washington. This week congressional Democrats indicated that they might pursue a two-pronged approach—passing a modest package of $50 billion or so during the lame-duck session that begins on Nov. 17, and then taking up a much larger package when the new Congress convenes in January. The timing seemed to be based on a desire to make sure that the new Administration gets the credit for enacting fiscal stimulus. However, it is possible that congressional leaders will reconsider this strategy in the wake of the miserable employment report and attempt to pass a large-scale stimulus package as soon as possible.

Michael Englund, Action Economics

The U.S. wholesale trade report revealed an inventory shortfall from our assumptions through September, and price-led weakness in sales. The mix prompted a big downward revision in our third-quarter GDP estimate to -0.7% from the advance report of a 0.3% drop. We still have potential offsetting upside third-quarter GDP risk from next week's September trade deficit report. [The September] data continue to show price swings having a bigger impact on sales than inventories, as we saw a 1.5% September sales drop that was led by a 1.9% nondurable decline alongside a 1.0% durable decrease, and downward revisions for both in August. The small September inventory drop of 0.1% included a price-led 1.4% nondurable decline but a 0.8% durable goods increase.

Today's data are consistent with our downwardly revised -3.0% fourth-quarter GDP figure with a big $47 billion inventory subtraction that will leave a huge $97 billion fourth-quarter inventory liquidation rate. Today's wholesale data brought a rise in the inventory-to-sales (I/S) ratio to 1.12 in September from 1.10 in August and an all-time low of 1.06 as recently as June, and this ratio should rise further to 1.17 by November, as prices drive sales down faster than inventories.

Beth Ann Bovino, Standard & Poor's

The International Council of Shopping Centers' October overall same-store sales dropped 0.9% from last year, the weakest October reading in more than 35 years, as concerns over the economy and financial market turmoil kept consumers away from the malls. Wal-Mart (WMT) reported a 2.4% increase in October. Excluding Wal-Mart, sales plunged 4.2%, the largest monthly drop since 1991. Luxury retailers reported the biggest declines, while department and apparel retailers were also weak. ICSC said retailers' same-store sales are expected to rise just 1% over the last holiday sales period, revised down from their earlier forecast of 1.7%, reported a few weeks ago.

The disappointing October sales and bleak holiday sales forecast will continue to weigh on already dreary market moods.

Peter Morici, Robert H. Smith School of Business, University of Maryland

Ending Chinese currency market manipulation and other mercantilist practices is critical to reducing the non-oil U.S. trade deficit and instigating a recovery in U.S. employment in manufacturing and technology-intensive services that compete in trade. Neither President Bush nor congressional leaders like Charles Rangel and Chuck Schumer have been willing to seriously challenge China on this issue, and Senators John McCain and Barack Obama appeared comfortable with continuing their approaches during the campaign.

Now President-elect Obama must alter his position and get behind a policy to reverse the trade imbalance with China, or preside over the wholesale destruction of many more U.S. manufacturing jobs. These losses have little to do with free trade based on comparative advantage. Instead, they deprive Americans of jobs in industries where they are truly internationally competitive.

In the end, without assertive steps to fix trade with China, as well as moves to repair the banks and curtail oil imports, the real income losses during the Bush Administration will seem like a walk through the park compared with those Americans will suffer during the Obama years.

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