The New York Times
Unexpected Loss of Jobs Raises Risk of Recession
By DAVID LEONHARDT and JEREMY W. PETERS
The job market took a serious and unexpected turn for the worse last month, raising the risk of a recession and putting added pressure on the Federal Reserve to move more aggressively to keep the ailing housing industry from infecting the rest of the economy.
The Labor Department reported yesterday that 4,000 jobs were lost from July to August, and the deepest cuts were in industries that are connected to the housing market, like construction and manufacturing. It was the first employment decline since 2003, when the job market was still struggling to emerge from the slump after the 2001 recession.
The jobs report all but guarantees that the Fed 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 likely move, although a half-point cut now cannot be ruled out, economists said.
The unexpected weakness in employment changed the terms of the debate over the health of the economy. Before the report was released, most economists were predicting that the economy had added about 100,000 jobs in August and that growth had slowed but continued.
But now, the odds of a recession in the next year have risen, to 25 to 50 percent, economists interviewed yesterday said. A recession is typically defined as an extended period in which the economy shrinks, leading to a rise in unemployment and a drop in consumer spending and business investment.
“People need to start thinking about the housing market not just as some ring-fence problem which is off on its own,” said Nigel Gault, chief United States economist at Global Insight, an economic research firm in Lexington, Mass. “They need to start worrying about the health of the broader economy.”
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. The Standard & Poor’s 500-stock index was down more than 1.5 percent. The Dow Jones industrial average dropped almost 250 points.
The unemployment rate held steady at 4.6 percent in August, but economists said that was at least in part a fluke of the survey 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.
The Bush administration tried to defuse concerns that the weak jobs numbers hinted at a wider economic slowdown. In an interview with Bloomberg Television yesterday, Treasury Secretary Henry M. Paulson Jr. said the report was “not totally surprising.”
“There will be news that is not 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 and that other factors, like corporate earnings, growth in other countries and strong wage advances, would keep the slowdown from being severe.
That could still happen; in the economic expansions of both the 1980s and the 1990s, 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 D. Levy, chief economist at 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 released yesterday was the government’s revision to its employment data for June and July. The new numbers show just under 70,000 jobs being created in each of the two months. Initial estimates had been an average of almost 110,000 a month.
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 that others think one is on the way. With house prices falling in most of the country and oil prices having risen, 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 was.
Hospitals, doctors’ offices, restaurants and retail stores added jobs in August.
But the bright spots were few. 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 yet fully felt. Since then, some large lenders like Lehman Brothers have continued to lay off workers.
And just yesterday, two mortgage lenders, Countrywide Financial and IndyMac Bancorp, said they would shrink their work forces. Countrywide said it would cut as many as 12,000 jobs over the next three months, and IndyMac Bancorp said it would trim 1,000.
“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 that continues will determine the Fed’s course of action. The price of a futures contract tied to Fed policy indicates that the central bank will probably cut the benchmark rate, now 5.25 percent, to 4.5 percent by the end of the year. But a growing number of economists are saying that may not be soon enough.
Mr. Gault of Global Insight, who is forecasting a cut of half a point 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, 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 therefore were not classified as employed or unemployed, rose by almost 600,000 in August.
“That’s a sign of economic weakness,” said Scott Anderson, a senior economist at Wells Fargo. “Perhaps people just gave up trying to find jobs.”
The number of people with part-time jobs who said they would prefer to work 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, continued 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 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 shown merely lackluster growth, investors might have welcomed it as a sign that a Fed rate cut was all but certain and that the economy was still growing at a healthy pace.
The reversal in employment, however, was far different from the gain of roughly 100,000 jobs that Wall Street had been expecting, raising worries that corporate profits and wage gains could 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 liberal Economic Policy Institute. “And it appears it has with a vengeance.”