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News > Economy
Unemployment creeps up
July 6, 2001: 11:23 a.m. ET

U.S. jobless rate climbs a little less than expected in June; payrolls slashed
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NEW YORK (CNNfn) - The U.S. unemployment rate edged higher in June while the economy shed thousands of jobs, the government said Friday, pointing to more weakness in the labor market.

The unemployment rate rose to 4.5 percent from 4.4 percent in May, the Labor Department reported, compared with Wall Street forecasts for a rate of 4.6 percent.

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Meanwhile, the economy lost 114,000 jobs last month versus forecasts for a loss of only 40,000. The government said 8,000 jobs were created in May, better than its original estimate of a loss of 19,000 jobs in May.

The mixed report with the unemployment rate a little stronger than expected and the drop in payrolls much worse showed weakness in the U.S. economy continued in the recently ended second quarter.

"In the aggregate, the economy has clearly stalled, and at best grew close to zero in the second quarter," said Alan Ruskin, research director at 4Cast Ltd.

U.S. stocks traded lower after the report, in part because of several corporate profit warnings Friday morning. Interest-rate-sensitive Treasury bond prices sold off after the report, but later regained ground, as traders hoped the weakness in the report would prompt the Federal Reserve to cut short-term interest rates for the seventh time this year.

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graphicEconomist Charles Lieberman gives his analysis of the June employment report
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U.S. companies have cut hundreds of thousands of jobs since the beginning of the year, trying to stay profitable during an economic slowdown. In the second quarter alone, the economy lost 271,000 jobs, the first period with a cumulative decline since the first quarter of 1992, when the economy was pulling out of a recession.

The manufacturing sector continued to bear the brunt of the slowdown, cutting 113,000 jobs, its eleventh consecutive month of job losses. The service sector also finally began to show signs of weakness after months of relative strength, losing 6,000 jobs.

The Federal Reserve, the U.S. central bank, has slashed short-term interest rates six times this year in an effort to keep consumers spending and avoid another recession. Friday's data may encourage them to cut rates one more time at their next meeting, scheduled for Aug. 21.

"The Fed is still in the game, and the odds of it easing again are higher than the 50-percent probability the [implied yield on] Fed funds futures had going into these data," Ruskin said.

Still, unemployment isn't nearly as bad as it was in the last recession at its peak, in June of 1992, unemployment was at a whopping 7.8 percent.

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And unemployment is a lagging economic indicator, meaning it can continue to worsen even after a slowdown or recession is over. Though many economists think unemployment could climb as high as 5 percent this year, recent economic data including a rise in factory orders and an improvement in a key index of manufacturing activity have suggested that the economy is gearing up for a recovery.

"[The jobs number] doesn't change the perception that the U.S. economy is working through the slowdown and that it will continue working it out for the rest of the year," said Bob Lynch, currency strategist with BNP Paribas.

The Labor Department will issue its July unemployment report before the Fed's next policy meeting; that, along with other leading economic indicators, could mean more to the Fed than the June unemployment report.

"We've got a lot of data to digest between now and [August 21], and the situation could look a little bit different by the time the [Fed] next meets," Michelle Girard, Treasury market strategist at Prudential Securities, told CNNfn's Market Call program.

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There is still a danger, though, that protracted weakness in the labor market could curtail consumer spending, which makes up two-thirds of the U.S. economy.

"The service [sector] is holding this economy together, but there are signs it's beginning to deteriorate," said John Challenger, chief executive officer of outplacement firm Challenger, Gray & Christmas, which studies job cuts. "As those companies begin to cut back, we're going to see increasing unemployment, and consumer spending... is likely to get much worse, and that's going to create higher unemployment."

This vicious cycle could take the relatively low unemployment rate much higher by the end of the year, Challenger told Market Call. (254K WAV) or (254K AIF)

The Labor Department report also showed average hours worked remained steady in June at 34.3 hours per week. Workers' wages grew 0.3 percent to $14.29 an hour in June from $14.25 in May, meaning inflation is largely in check -- good news for the Fed, which must be careful that it doesn't pump too much money into the economy. graphic


-- from staff and wire reports

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