Jobs weak, unemployment soars
Employers add fewer to payrolls than forecast, and the jobless rate hits 5%, a two-year high.
NEW YORK (CNNMoney.com) -- The nation's labor market worsened in December to the weakest level since the shock that followed Hurricane Katrina, as the problems in housing and mortgages took a bite out of job opportunities.
Employers added far fewer jobs in the month than had been forecast, while the unemployment rate shot up to 5 percent, which was a two-year high, according to a government report Friday.
Stocks sold off sharply on rising fears of a possible recession and there was a widespread belief in the markets that the Federal Reserve would have to respond to this report with a sharp drop in interest rates.
"December's bleak jobs report represents the siren call that this business cycle is just about over," said Bernard Baumohl, the managing director of the Economic Outlook Group, an economic research firm in Princeton, NJ. "We're about to tilt over to the other side of the economic curve and begin the downswing."
But some other economists suggested the report was not as weak as it appears.
"Yes, job creation is slowing, but 5 percent unemployment does not a recession make," said Rich Yamarone, director of economic research at Argus Research.
He said part of the problem with the report was an ice storm that hit much of the central United States the week the Labor Department was collecting data. Many of the tens of thousands of workers unable to get to their jobs due to the storm were not counted as employed if they didn't get paid for their missed work.
David Wyss, chief economist for Standard & Poor's, agreed with Yamarone that unemployment is at a historically low standard. But he said the steady rise in the number of Americans who describe themselves as unemployed is a concern because it could put the brakes on consumer spending going forward. Wyss said he now believes there's about a 50-50 chance of a recession this year, up slightly from his previous estimate of a 40 percent chance of a recession before this report.
"The unemployment rate is key for people. People are going to get nervous," he said. "There were a couple of special factors. But even when you adjust for those factors, this is bad."
The report showed a net gain of 18,000 jobs in the month, down sharply from the revised 115,000 gain reported in November, the Labor Department said. Economists surveyed by Briefing.com had forecast a gain of 70,000 jobs.
The December job gains figure was the weakest one-month gain in jobs since a loss was reported in August 2003. It capped a 2007 that was the weakest for job growth since 2004. The average level of Americans with jobs during the year was up 1.8 million compared to 2006, with the second half of the year seeing much weaker gains than the first half. And even before this report, most economists were forecasting further sharp declines in employment gains in 2008, with an increase of close to 1 million in the full-year average, and many months when there is a net decline in U.S. payrolls.
The weak report raised expectations that the Federal Reserve will make another deep rate cut at its meeting on Jan. 31. While stocks fell, the bond yield also fell sharply. Investors trading fed funds futures were pricing in a 75 percent chance that the central bank would move to cut rates by a half percentage point at the end of the month, up from a 67 percent chance of a cut that deep at the close of trading Thursday.
The 5 percent unemployment rate was the highest reading since November 2005, when job losses from Hurricane Katrina were still being felt. The unemployment rate had been 4.7 percent in November, and economists had expected it to creep higher to just 4.8 percent.
The rise was the biggest one-month jump in the unemployment rate since August 2001, when the nation was in a recession.
The report found a 49,000 seasonally adjusted drop in construction jobs. While home building has been sharply off for most of 2007, the losses in construction as a whole had been limited by strong non-residential building, such as offices and government projects. But this time there were job losses across all of the various sectors of construction.
In addition, manufacturing jobs fell by 31,000. Once again, the losses were spread throughout the sector, not limited to the battered auto industry where job losses were well known, and included appliance makers as well as manufacturers of electronics, computers, clothing and other nondurable goods.
The service sector fared better, adding 93,000 jobs as a whole. But even in that sector there was weakness, as retailers trimmed 24,000 workers in the seasonally-adjusted estimate, as many of them reported weaker-than-hoped December sales ahead of the holiday.
"Now we've seen the lackluster holiday retail season show up in jobs," said Tig Gilliam, CEO of Adecco Group North America, a unit of the world's largest staffing firm.
But Gilliam said for the most part most of his clients not in housing and mortgage lending are continuing to look to add staff. And he said one encouraging part of the report is that some of the job losses in banking seem to have played themselves out.
The group of employers that includes lenders continued to cut jobs, according to the report. They responded to the problems in the mortgage markets by trimming 7,000 more jobs, although that is actually the smallest cut by that group of employers since July. Banks saw employment stay basically unchanged.
"I don't think we've seen the end of problems, but we had previously lost 80,000 [lender] jobs," he said. "This latest report suggests to me a lot of the job adjustments around subprime have been made."