Jobs: December's Big Chill
By BW, Standard & Poor's, Action Economics, and AP staff
A surprisingly weak report on U.S. employment released Jan. 4 by the Labor Dept. fanned fears of a recession.
The unemployment rate jumped from 4.7% in November to 5% in December, the highest since November, 2005 after the Gulf Coast hurricanes dealt the country a mighty blow. Payrolls—both private employers and government—grew by just 18,000 in December, the worst showing since August, 2003, when the economy suffered job losses as it struggled to recover from the 2001 recession.
The December employment data suggest that the housing contraction and the credit-market turmoil have finally wound their way into the job market, says Action Economics.
The December employment picture was much weaker than economists were expecting. They were forecasting the unemployment rate to bump up to 4.8% and for employers to add around 70,000 jobs to their payrolls.
"The only silver lining is that a January rate cut is now nearly certain, maybe even 50 basis points," wrote S&P Economics in a Jan. 4 note.
Housing and Credit Problems Sink In
Employers have grown cautious as they try to cope with fallout from housing and credit problems and rising uncertainty about how the economy will fare in the months ahead. Galloping energy prices and bad weather in some parts of the country also probably figured into the weak job figures.
Manufacturers, construction companies, and financial services all cut jobs in December—casualties of the housing slump. Retailers also sliced jobs.
The government added 31,000 jobs in December, while private employers actually cut payrolls by 13,000, underscoring the weakness.
A drop of 49,000 construction jobs was the major surprise in the report, says S&P Economics, probably reflecting December weather.
For all of 2007, the unemployment rate averaged 4.6%, the same as last year.
Still Historically Low
The 5% rate is relatively low by historical standards. In the recession of the early 1980s, for example, the jobless rate reached double-digit levels.
Nevertheless, with the economy losing momentum, the White House and some economists at the Federal Reserve predict that the jobless rate will average 4.9% this year.
U.S. stock indexes opened sharply lower Jan. 4. In a sign of the concern that a recent run of weak data has engendered in Washington, President George W. Bush was expected to meet with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson about a possible economic stimulus plan. Bond prices soared Jan. 4 on the data amid rising expectations of more aggressive action by the Fed.
Indeed, prices of Fed funds futures, which signal market expectations of the direction of interest rates, were priced for more than a quarter-point easing at the end of the month, according to Action Economics, and were showing about a 50-50 bet for an aggressive 50-basis-point reduction.
The health of the nation's job market is a critical factor in determining whether the economy will survive the stresses from housing and harder-to-get credit. The positive forces of job and wage growth have helped to cushion individuals from all the negative forces in the economy. The big worry is that people will clamp down on their spending and businesses will put a lid on investment and hiring, throwing the economy into a tailspin.
Average hourly earnings for jobholders rose to $17.71 in December, a 0.4% increase from November. Economists were forecasting a modest 0.3% gain. For all of 2007, wages increased 3.7%, down from a 4.3% gain in 2006.
The "robust wage gains and stable hours-worked figures…will restrain the Fed at the January FOMC meeting," says Action Economics.
High energy prices, though, probably made some workers feel like their paychecks aren't stretching as far as they would like.
To fend off the possibility of a recession, the Federal Reserve cut a key interest rate three times last year. Policymakers are expected to lower rates again when they meet later this month.
The Fed's job of keeping the economy expanding and inflation under control, however, is becoming more complicated.
Oil prices briefly marched past $100 a barrel this week. High energy prices are a double-edged sword as they can sap economic growth and also spread inflation throughout the economy if they cause a rise in prices of other goods and services.
Problems in the economy have elevated fears about a recession. The housing and mortgage markets have melted down. Home foreclosures have soared to record highs and financial companies have racked up billions of dollars in losses from bad mortgage investments. Credit problems have made it difficult for people to finance big-ticket purchases and for companies to expand operations and boost hiring.
Many analysts believe the economy's growth slowed sharply in the final three months of 2007, to a pace of around 1.5% or less. Growth in the January-to-March period also is expected to be weak. Alan Greenspan, former Fed chairman, recently warned that the economy is "getting close to stall speed."
The White House and Democratic-controlled Congress have blamed each other for not doing enough to stem the fallout related to the housing and credit debacles.