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Caution: Job losses ahead

Economists say recession fears could lead to weak employment in 2008 as companies may become more cautious about adding workers.

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By Chris Isidore, CNNMoney.com senior writer

Do you think the U.S. economy will fall into recession this year?
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NEW YORK (CNNMoney.com) -- The labor market is expected to end 2007 with a whimper, but even that modest forecast could be seen as "the good old days," since monthly job losses may become common in the year ahead, according to economists.

The December employment report due at 8:30 a.m. ET Friday should see a net gain of 70,000 jobs in the month, according to economists surveyed by Briefing.com, down from the 94,000 gain reported in November.

That gain is roughly half of what is seen as necessary to keep pace with the growth in the nation's labor force, and economists are expecting the unemployment rate to edge up to 4.8 percent, a 22-month high for that key measure.

Those forecasts were made before Thursday's ADP National Employment Report for December showed only a 40,000 job gain in the private sector in the month, sharply off of the 173,000 gain it calculated for November. The report uses payroll data from hundreds of businesses, both large and small.

The Monster Employment Index, which tracks online job search listings, also fell 14 points in December, with only about half of that decline attributed to seasonal factor, according to the firm.

With economists looking for economic growth to stall in the months ahead, many are forecasting that employers will get very cautious with their hiring plans going forward. While much of the job weakness in 2007 was concentrated in residential construction, manufacturing and finance, many believe that weakness will spread this year.

"At the margins, businesses are being more cautious about spending," said economist David Kelly, the chief market strategist for JPMorgan Funds. "Consumers are addicts and they'll keep spending. But if businesses expect recession and put in hiring freezes, that'll have an impact."

Kelly believes there are quarters ahead that will notch a net loss of jobs, even if the overall economy continues to grow. And many economists say they're nervous about whether the economy will be able to keep growing this year.

"If nothing else goes wrong, we'll avoid a recession," said David Wyss, chief economist for Standard & Poor's. "Unfortunately I can give you a long list of things that can go wrong right now -- oil prices, currency weakness, foreign confidence in the U.S. declining, the credit crunch, housing prices, consumer and investor panic."

Wyss said he believes the chance of a recession this year stands at about 40 percent, but that even if the economy continues to dodge those bullets, he's looking for much weaker job growth in the year ahead. He's forecasting just under 1 million jobs added in 2008, which would be down from his estimate of about 1.5 million jobs added last year.

But Gus Faucher, director of macroeconomics for Moody's Economy.com, said he's looking for about a 60 percent drop in hiring in 2008 if the economy avoids a recession, and possibly a job loss for the year if economic activity starts to decline. And his firm now puts the chance of a recession at 50 percent.

"If it's the wrong side of that 50 percent, then we see employment losses starting in the middle of the year and lasting for two or three quarters," he said. "Our baseline forecast is still for weak expansion, but even if that's the case, the weakness in the labor market is going to spread. We certainly could see a few negative months mixed up in there."

Some executives involved in job searches believe that employers will keep hiring this year, but most of them agree with economists forecasting that job gains will slow.

John Challenger, CEO of the outplacement firm Challenger, Gray & Christmas which tracks layoff announcements, said that the 2007 layoff announcements were at seven year low, and ended with December showing the lowest level of job cuts announcements of the year.

"It seems likely to me that fears of market collapse or recession are overblown and creation will come in stronger than most people expect," he said. "When you see job loss and downsizing slowing down, you'll inevitably see job creation. What's remarkable about the last six months is that given the fears out there, we haven't seen job cutting and declines outside of housing and automotive."

Jonas Prising, president for North America for staffing firm Manpower agrees employers have not been shaken by the subprime mortgage meltdown as much as many feared. He points to his firm's survey of first quarter hiring plans, conducted in November, which showed 22 percent of employers still expect to add to their payrolls during the first quarter of 2008, while 12 percent expect to reduce staff levels, readings that were little changed from a year earlier.

"The job market will soften somewhat and not fall off a cliff," said Prising. "Employers are more cautious when they're hiring. They'll go to greater steps before they add people to payrolls. But they're still hiring.

Richard Castellini, the vice president of consumer marketing for the online job search site CareeBuilder.com, said he could see net job gains slowing to 50,000 a month, but he doubts there will be job losses.

"We see a slowing but still a steady hiring," he said."There's still strong demand across a lot of areas."

Joel Prakken, chairman of Macroeconomic Advisors, which processes the ADP payroll services data to produce that firm's monthly employment report, said that the smaller employers tracked by the firm have continued with strong hiring levels, even as large employers trimmed jobs in the December reading.

"The one thing you can say for sure, small businesses continue to be the powerhouse of employment. It's pretty impressive," he said. His forecast is for job growth to average about 90,000 a month throughout 2008, down almost 30 percent from 2007's gains. But he sees stronger gains being posted in the later portion of the year. To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.