January Employment May Be Down by Another 500,000

The U.S. economy has too much stuff for sale and too few buyers, and that's why you can look forward to another ugly jobs report from the Bureau of Labor Statistics on Feb. 6. Job losses for January were probably the worst in manufacturing and other parts of the economy related to the production, distribution, and sale of goods. Economists expect to see greater strength in services, especially education and health care, which are the most insulated from troubles in the goods sector. (For a closer look at the discrepancy between the goods and service sectors, see "What Falling Prices Are Telling Us.")

Employers probably cut payrolls by around 540,000 jobs in January, according to the median estimate of economists surveyed by Bloomberg. Estimates of the number of jobs lost in the month ranged from 400,000 to 750,000. The economy has been shedding around half a million jobs every month since last September as the recession deepens. The jobless rate probably rose to 7.5% in January, according to the median forecast in Bloomberg's survey. That would be the highest since 1992.

Merrill Lynch (BAC) economist Sheryl King, in a Feb. 4 report, wrote that businesses have been "sideswiped" by a slowdown of demand in the U.S. and abroad. Manufacturers didn't react quickly enough to the slump and have gotten stuck with lots of unsold goods and unneeded raw materials. In recent months inventories have surged at the fastest pace in proportion to sales since the recessions of the mid-1970s and early 1980s, King wrote. Now, companies are belatedly cutting production to work off some of those inventories, which means they don't need as many workers. In manufacturing, "the surge in inventories suggests to us there will be further deep production cuts in the coming months," King says.

But it's not just factories that have bloated inventories. So do middlemen and retailers. Among the wholesale sectors with an overabundance of inventories are autos, lumber, plumbing, and electrical products. At the retail level, it's autos (again), along with building materials, clothing, furniture, and electronics. Inventories are better under control in the food and beverage sector, at least so far.

The silver lining of the inventory correction is that eventually companies run down their supplies so far that they need to crank up production to replace them. Merrill Lynch expects that to start happening in the second half of 2009.

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