[NYTr] Booming Economy: Recession Fear Rises As Jobs Growth Ends

[All the News That Doesn't Fit]

The New York Times - Sep 7, 2007
http://www.truthout.org/docs_2006/090707T.shtml

Recession Fear Heightened As 4-Year Growth in Jobs Ends

    By David Leonhardt and Jeremy W. Peters

    The job market took a serious and unexpected turn for the worse in
August, raising fears that the risks of a recession are greater than
many economists had believed.

    The economy shed 4,000 jobs between July and August, with industries
that are connected to the housing market - like construction and
manufacturing - making the deepest cuts, the Labor Department reported
today. It was the first employment decline since 2003, when the job
market was still struggling to emerge from a long slump in the wake of
the 2001 recession.

    The unemployment rate held steady at 4.6 percent in August, which
economists said was likely a statistical fluke as more people stopped
looking for work and were therefore not counted by the government as
unemployed.

    "If the economy is not headed toward recession, it is very close to
one," said Mark Zandi, chief economist at Moody's Economy.com.

    Stocks fell broadly and sharply, as investors digested the idea that
the economy had been weakening significantly even before the mortgage
crisis hit financial markets last month. Shortly after 3 p.m., the Dow
Jones industrial average was off more than 230 points, or 1.7 percent.
The Standard & Poor's 500 stock index and Nasdaq composite were showing
comparable declines.

    The jobs report all but guarantees that the Federal Reserve will cut
its benchmark short-term interest rate when its policy-making committee
meets on Sept. 18. A quarter-point reduction to 5 percent remains the
most probable move, although a half-point cut now cannot be ruled out,
economists said.

    The weakness of the employment data seemed to change the terms of
the debate over the health of the economy. The chances of a recession
over the next year now seem to be somewhere between one-quarter and
one-half, economists interviewed today said.

    "I think at least people need to start thinking about the housing
market not just as some ring fence problem which is off on its own, and
the rest of the economy is doing just fine," said Nigel Gault, chief
United Economist with Global Insight, an economic research firm in
Lexington, Mass. "They need to start worrying about the health of the
broader economy."

    The Bush administration tried to defuse concerns that the weak jobs
numbers hinted at a wider economic slowdown. In an interview with
Bloomberg Television today, Henry M. Paulson, the Treasury Secretary,
said the report was "not totally surprising."

    "There will be news that isn't always good news," he said. "But I
feel quite strongly that we have a resilient economy."

    For months, Fed officials and Wall Street forecasters have been
predicting that the housing slump would slow the economy, but that other
strengths - like corporate earnings, growth in other countries and
strong wage growth - would keep the slowdown from being severe. That
could still happen; in both the 1980s and 1990s economic expansions,
employment fell at least once before quickly reversing course.

    "The financial turmoil and extended problems in housing put the
risks for the economy clearly to the downside - no question," said
Mickey Levy, chief economist for Bank of America. "But there are also
factors that suggest a longer period of slower growth, but not
recession."

    One of the most worrisome signs in the jobs report was the
government's revision to its employment data for June and July. The new
numbers show just under 70,000 jobs created in each of the two months,
down from an average of almost 110,000 according to its initial
estimates.

    In 2005 and 2006, the average monthly job growth was slightly above
200,000.

    The sharp slowdown this year suggests that some employers have
already begun to see a downturn in their business and others believe
that one is on the way. With falling house prices in most of the
country and rising oil prices, consumer spending has slowed modestly in
recent months.

    State and local government agencies, many of them dealing with
budget shortfalls connected to the housing slump, have also cut an
average of 27,000 jobs a month over the last three months. But
economists said the declines in government employment, especially in
schools, may have reflected seasonal quirks that made the job market
look worse last month than it truly was.

    Hospitals, doctors' offices, restaurants and retailers all added
jobs in August.

    But the bright spots were few and far between. Employment in the
finance sector - which includes real estate agencies and accounts for
about 8.5 million of the country's 138 million jobs - was flat in
August, which could be a sign that the government numbers have not yet
captured some of the mortgage-related job cuts now occurring.

    The surveys that made up the Labor Department report measured
employment from Aug. 12 to Aug. 18, when the credit squeeze and
subsequent stock market turmoil were under way but not fully felt. Since
then, some large lenders like Countrywide and Lehman Brothers have
continued to lay off workers. And just today, IndyMac Bancorp, a large
mortgage lender, said it would be cutting about 1,000 jobs over the next
several months.

    "There probably was not that much influence in the data from the
credit shock," said Richard Berner, chief United States economist at
Morgan Stanley. "So I think more weakness in the economy is likely. The
economy is clearly losing momentum."

    The extent to which the economy continues to lose momentum will
determine the Fed's course of action. The price of a futures contract
tied to Fed policy shows that the central bank will probably cut the
benchmark rate, now at 5.25 percent, to 4.5 percent by the end of the
year. But a growing number of economists are saying that might not be
soon enough.

    Mr. Gault of Global Insight, who is forecasting a half-point cut on
Sept. 18, said it would send "an important message that the Fed sees
there are real problems here, there's a real threat, and it needs to
have a response that's commensurate to that threat."

    Although the unemployment rate held steady at 4.6 percent, the
percentage of adults with jobs fell to 62.8 percent, from 63 percent in
July and a peak of 63.4 percent in December. The number of people who
were neither working nor looking for work - and thus considered neither
employed nor unemployed by the government - rose by almost 600,000 in
August.

    "That's a sign of economic weakness," Mr. Anderson, of Wells Fargo,
said. "Perhaps people just gave up trying to find jobs."

    The number of people with part-time jobs who said they would prefer
to full time has also been rising in recent months. In August, the Labor
Department classified 4.5 million workers as "part time for economic
reasons," up from 4.3 million in July.

    Wage growth, which often lags behind job growth, did continue at
roughly its recent pace. Average hourly earnings for rank-and-file
workers - who make up about four-fifths of the work force - have
increased 3.9 percent over the last year, to $17.50. Inflation has been
running at about 2.5 percent a year.

    Wall Street had eagerly awaited the jobs report because it was the
most significant economic data released since financial markets began to
tumble in early August. If the jobs report had been merely lackluster,
it might have been welcomed by investors as a sign that a Fed rate cut
all but certain and the economy was still growing at a healthy pace.

    The reversal in job growth, however, was far different from the gain
of roughly 100,000 jobs that Wall Street was expecting, raising worries
that corporate profits will weaken as the market upheaval moves beyond
the housing and financial sectors.

    "The big question on all of our minds is whether the financial
market contagion would reach the labor market," said Jared Bernstein, an
economist with the Economic Policy Institute. "And it appears it has
with a vengeance."

Vikas Bajaj contributed reporting.