By Jason Simpkins
Payrolls tumbled for the sixth consecutive month in June, bringing the total number of job losses in the first half of the year to 438,000.
Such a steep drop in employment could easily cause consumer spending to falter in the months ahead and drag the economy into a recession.
After shedding 62,000 jobs in May, U.S. employers slashed another 62,000 jobs in June, the Labor Department said last week. Builders reduced payrolls by 43,000 after cutting 37,000 employees in May. Financial firms cut 10,000 jobs in June after losing 3,000 the month prior. And factory payrolls dropped by 33,000 after declining 22,000 in May.
The national unemployment rate has gone up by a full percentage point in the past year, hitting 5.5% in May. The country added 91,000 on average in 2007, but has lost an average of 71,000 jobs each month this year.
Goldman Sachs (GS) recently predicted that the unemployment rate will peak at 6.4% in 2009, the International Herald Tribune reported.
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"The labor market is clearly deteriorating, and it's highly likely to keep deteriorating," said Goldman Sachs economist Andrew Tilton. "It's clear that the housing downturn and credit crunch are still very much under way. Clearly, there are more jobs to be lost in housing, finance and construction — hundreds of thousands of more jobs to be lost collectively."
Unemployment is both a symptom and a cause of economic weakness. But it is particularly potent economic poison at this time, as lending conditions have tightened and consumer confidence continues to wane. Families have fewer opportunities to borrow against the value of homes that are continually losing value. Meanwhile, food and energy prices have jumped exponentially, further straining household budgets.
The Conference Board said last month that consumer confidence had hit its lowest level in 16 years. The group's overall monthly index tumbled to 50.4 in June, its lowest point since hitting 47.3 in February 1992.
Consumer spending in the United States actually rose 0.8% in May, the biggest increase since last November, but that bump was largely attributable to the $78 billion worth of rebate checks sent out by the government.
As the effects of the government's stimulus package wear off, consumer spending will likely experience a sharp drop and further hinder economic growth, which maintained a sluggish 1% growth rate through the first quarter.
"It's a slow-motion recession," Ethan Harris, chief United States economist for Lehman Brothers Holdings Inc. (LEH), told the IHT. "In a normal recession, things kind of collapse and get so weak that you have nowhere to go but up. But we're not getting the classic two or three negative quarters. Instead, we're expecting two years of sub-par growth. Growth that's not enough to generate jobs. It's kind of a chronic rather than an acute pain."
Even if the country fails to meet the technical criterion for a recession, it's hard to argue that the economic picture is anything but bleak at this point.
"While we may not technically fall into a recession, it doesn't change the reality that conditions are really weak," Joel Naroff, president and chief economist at Naroff Economic Advisors, wrote in a note to clients. "And with jobs being lost and unemployment claims rising, the situation looks to be worsening further."
As the economy deteriorates in "slow-motion," as Lehman's Harris put it, the hands of Chairman Ben S. Bernanke and the U.S. Federal Reserve are tied. The Fed has already slashed its benchmark Federal Funds rate by 325 basis points to 2%, emaciating the dollar and exaggerating inflationary pressures.
Ben Bernanke's House of Cards
The Fed ended its rate-cutting campaign last month, saying, "The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high."
Commodity prices are soaring with oil leading the way. The price of crude has hit a series of record highs over the past several months, and is currently nearing $150 per barrel. The price of gasoline has hovered above $4 a gallon for about a month, as a result.
Even excluding the volatile costs of food and energy, the so-called "core" consumer price index is running at a 2.3% annual clip, above the Fed's desired 2.0% inflation target.
The problem is even worse in the Eurozone where inflation hit 4%. The European Central Bank (ECB) was forced to boost its refinancing rate 25 basis points to 4.25% – the highest level since August 2001 – as a result.
The large discrepancy in interest rates helped push the dollar to an all-time low of $1.6019 against the euro on April 22. The dollar has fallen approximately 15% against the euro in the past year.
Speaking to reporters at a conference in Frankfurt, ECB President Jean-Claude Trichet said the bank was concerned about the dollar's yearlong slide against the euro because it undermines European exports by making them more expensive.
"We have observed in the recent period of time sharp fluctuations and we are concerned about their possible implication for financial and economic stability," Trichet said. "More than ever, what is said by the U.S. authorities at the level of president, minister of finance and Ben Bernanke on the fact that a strong dollar is in the interest of the U.S., is very important."
"We central banks have a big responsibility," Trichet later told Germany's Die Zeit newspaper. "If we're not decisive, there's a risk of inflation exploding. If we act in a decisive way, we can master the situation."
Any further rate cuts to by the U.S. Federal Reserve would likely unleash inflationary pressures and spur prices even higher. It would also be detrimental to the U.S. dollar and its foreign exchange rate, as well as relations with Europe.
However, with the Fed unable to access its most effective tool, growth will undoubtedly suffer. With consumer confidence sliding alongside home values, and unemployment on the rise, the clock is ticking on economic expansion in the United States.
News and Related Story Links:
Department of Labor:
Employment Situation Summary
International Herald Tribune:
Forecast for U.S. workers: Gloom