U.S. Economy: Employment Unexpectedly Drops in August
Sept. 7 (Bloomberg) -- The U.S. economy unexpectedly lost jobs in August for the first time in four years, sending stocks lower from Warsaw to Wall Street and increasing speculation that the Federal Reserve will be forced to reduce interest rates to counter an economic slowdown.
The drop in employment, following a month-long increase in the cost of credit prompted by losses in the mortgage market, is the clearest sign yet that the U.S. expansion is in jeopardy. Payrolls are one of the main indicators, along with sales, wages and production, which help determine the start of economic contractions.
Employers cut 4,000 workers, compared with a revised gain of 68,000 in July that was smaller than previously reported, the Labor Department said today in Washington. The unemployment rate held at 4.6 percent as almost 600,000 people left the workforce.
``The recession risk has certainly increased,'' said Zach Pandl, an economist at Lehman Brothers Holdings Inc. in New York. ``It definitely cements the case for a rate cut at the next Fed meeting.''
The benchmark 10-year Treasury note's yield fell 14 basis points to 4.37 percent, the lowest since January 2006, at 4:17 p.m. in New York. The Standard & Poor's 500 Index fell 1.7 percent to 1,453.55.
``It's not the kind of number I'd like to see,'' Treasury Secretary Henry Paulson said in an interview in Washington. ``Data does not always move in a straight line, so occasionally you will find some surprises. The economy will continue to grow in the second half of the year.''
Paulson said he had breakfast with Fed Chairman Ben S. Bernanke today, as he does once a week. The former Goldman Sachs Group Inc. chief executive officer said he agreed with former Fed chairman Alan Greenspan that there are some similarities between the current market turmoil and that of 1987 and 1998.
Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, called on the central bank to reduce rates when policy makers next meet.
Companies that thrive when consumers spend the most led the stock-market retreat. Harley-Davidson Inc., the biggest U.S. motorcycle maker, lost $5, or 9.3 percent, to $49.09 for the steepest decline in the S&P 500 Index. General Motors Corp., the largest automaker, and Intel Corp., the biggest maker of computer chips, helped pace a drop in the Dow Jones Industrial Average.
Goldman's New Call
None of the economists in the Bloomberg survey predicted payrolls would shrink. Later in the day, Countrywide Financial Corp., the nation's biggest mortgage company, said it may fire 10,000 to 12,000 workers in the next three months. The company had about 55,000 employees at the beginning of the year.
Economists at Goldman changed their forecast for the next Fed meeting on Sept. 18, projecting the central bank will reduce its target rate by a half percentage point. Goldman had previously predicted a quarter-point cut.
``There is no doubt now that financial turbulence is having real effects,'' said Peter Kretzmer, a senior economist at Bank of America Corp. in New York. ``This Fed is going to cut; this makes it easier for them.''
Economists surveyed by Bloomberg News had forecast that payrolls rose 100,000 during the month, according to the median of 88 estimates, compared with an originally reported 92,000 gain in July. None of the analysts foresaw a decline.
Manufacturers, builders and the government led the drop in payrolls. Factory payrolls slid by 46,000, the most since July 2003, after slipping 1,000 a month earlier. Economists had forecast a drop of 10,000 in manufacturing employment.
Payrolls at builders dropped by 22,000 after falling 14,000 a month earlier. Government payrolls decreased by 28,000.
``It is a whole different ball game,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. ``The decline in manufacturing employment was much bigger than anyone expected. The probability of recession has increased pretty dramatically.''
Service industries, which include banks, insurance companies, restaurants and retailers, added 60,000 workers last month after boosting payrolls by 78,000 in July, the report showed. Retailers added 12,500 jobs after hiring 5,000 in July.
Average weekly hours worked by production workers held at 33.8. Average weekly earnings gained to $591.50 last month from $589.81 the prior month.
Bernanke last week said the central bank would do what's needed to prevent the credit-market turmoil from undoing the six-year economic expansion.
The Fed ``continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets,'' he said at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming.
Bernanke said the Fed would ``pay particularly close attention to the timeliest indicators'' since data prior to August didn't capture the credit crisis. Futures contracts are pricing a certain cut in the benchmark federal funds rate on Sept. 18.
The Labor Department's employment survey of businesses covers the week of Aug. 12, at the height of the decline in global stock markets, suggesting the figures won't reflect the full extent of the damage done by the subprime tumult.
Job and wage growth are needed to help sustain consumer spending, which accounts for more than two-thirds of the economy, as home values fall and loans become more difficult to get. Spending slowed to a 1.4 percent annual pace in the second quarter, down from 3.7 percent the previous three months.
First American Corp., the largest U.S. title insurer, said this week it would cut 1,300 jobs, or about 3 percent of its workforce, to reduce costs as home sales slow.
LandAmerica Financial Group Inc., a Richmond, Virginia- based title insurer, said Aug. 28 it will eliminate 1,100 jobs in the second half of 2007 to reduce costs as mortgage originations decline.
Lehman Brothers Holdings Inc. and Accredited Home Lenders Holding Co., both in the U.S., and HSBC Holdings Plc in London said last month they would cut a total of 3,400 jobs as tremors from the collapse of the subprime-loan market spread through the economy. At least 15 mortgage companies have filed for bankruptcy and about 50 have stopped lending or shut down entirely.
Declines in residential construction have detracted from overall growth for the last six quarters, and the housing slump is prompting economists to warn of rising risks of recession.
Harvard University economist Martin Feldstein, who heads the group that dates U.S. contractions, said Aug. 31 there is a ``significant risk'' of a recession.
``Downturns in housing construction have almost always been followed by a downturn in the economy, by a recession,'' Feldstein said in an interview from Jackson Hole. ``My judgment is there is enough of a risk that the Federal Reserve should be responding to that risk'' by cutting interest rates.