SORRY FOLKS, BUT
the recession is still alive and kicking.
The Labor Department reported Friday that the ranks of the unemployed swelled in November by a more-than-forecast 0.3% to a six-year high of 5.7%, with nonfarm businesses slashing 331,000 jobs on top of the 468,000 eliminated in October. Since March, when employment peaked and the recession officially began, 1.2 million positions have been eliminated.
The news dashed hopes that the economic recovery was at hand. "We have no reason to believe the economy's stabilizing," says Pierre Ellis, managing director and senior international economist at Decision Economics, a consultancy. "Things are still falling apart." Bruce Steinberg of Merrill Lynch, one of Wall Street's most bullish economists at one time, echoed that sentiment. "Those who mistakenly believed that the recession was nearly over just got a rude wake-up call."
The data came in far weaker than Wall Street had expected. A consensus of economists had forecast a jobless rate of 5.6% and a 200,000 job drop in nonfarm payrolls. The 1.8-point increase in the unemployment rate since October 2000 is already worse than the 1.4-point increase registered during the 1990-91 recession, but significantly smaller than the four-point jump experienced during the 1975 and 1982 contractions.
Friday's jobs report threw a wet towel on the recently embraced notion that the economy has already hit bottom. The Dow Jones Industrial Average dropped 49.68 points to 10,049.46; the Nasdaq Composite shed 33.20 to 2021.07; and the S&P 500 index declined 8.83 to 1158.27. "The markets got overexcited," says Lehman Brothers economist Joe Abate. "The economy is doing better than in the aftermath of Sept. 11, but it's premature to say the recovery is here in earnest."
The White House responded to the numbers with a call for action. "Today's unemployment numbers are troubling," said President Bush in a statement. "And they underscore that we must act to ensure America's economic security." Still, Congress remains as divided as ever over what to include in an economic stimulus package. Republican leaders offered Wednesday to support spending about $25 billion in additional unemployment insurance and health-care benefits for the jobless, but Democratic leaders dismissed the proposal as woefully inadequate.
Given the logjam on Capitol Hill, the role of reviving the economy falls to the Federal Reserve once again. Friday's jobs data virtually guarantee that Fed policy makers will cut interest rates for the 11th time this year at their scheduled meeting next Tuesday. Most economists believe the central bank will lower the benchmark federal-funds rate by a quarter-point, to 1.75%. "I think they'll definitely cut," says John Fox, co-leader of fixed-income at Boston-based investment firm Gannett Welsh & Kotler. "It's a no-brainer."
As was the case in October, job losses were widespread last month. Factory employment dropped for the 16th consecutive month, falling by another 163,000 and bringing the total decline since July 2000 to 1.4 million. Service industries which include temporary workers, retailers, government workers, travel-related businesses and the like cut jobs for a third straight month, letting go 164,000 workers in November on top of the 327,000 dismissed in the previous month.
Somewhat reassuring was the six-minute increase in the length of the average workweek, to 34.1 hours. In the typical business cycle, the number of hours worked increases before employment grows, since businesses are initially reluctant to resume hiring as demand accelerates. Some economists were also pleased to see average hourly earnings rise by 0.3%, or two cents, after inching up by just 0.1% in October. At an annual rate of 3.9%, wage growth hasn't significantly deteriorated from the 4.3% annual rate recorded in the same quarter a year ago. While rising wages aren't good for corporate profits, they help prop up consumer spending, which is particularly critical going into the holidays.
Unfortunately, as Ellis notes, the wage data in the employment report fail to capture other important forms of compensation, such as bonuses, benefits and salaries. A more comprehensive measure of compensation included in the quarterly productivity report has been nearly halved, falling to a 3.8% annualized growth rate in the third quarter from a 7.4% pace in the same quarter the year before.
Granted, consumer confidence, by one measure, appears to be improving: The University of Michigan reported Friday that its sentiment index rose for a third straight month, to 85.8 in early December from 83.9 in November. But it's also true that consumers say and do different things. Indeed, despite increasing optimism, retail sales appear to have gotten off to a lackluster start this holiday season. The Bank of Tokyo Mitsubishi reported Thursday that sales at stores open a year or more increased by a less-than-expected 2% in November the weakest growth pace since the last recession and well below October's 4% gain. While purchasing power has grown, thanks to declining energy prices, a boom in mortgage refinancing and zero-percent auto financing, mortgage rates have recently bounced off their lows, car makers are scaling back incentives, and prices at the pump are expected to stabilize soon. "It's hard to imagine that spending would be anything but weak this Christmas," says Bill Cheney, chief economist at John Hancock Financial Services.
So investors can pretty much count on at least one more quarter of contracting economic activity. In fact, gross domestic product, or GDP, is on track to contract by 1.5% to 2% in the current fourth quarter, according to Wachovia Securities economist Jay Bryson. And although the pace of layoffs is likely to slow in coming months, Merrill's Steinberg says, "hundreds of thousands of more jobs probably need to go" to restore corporate profitability. A majority of economists say the jobless rate, which typically rises even after the economy has stabilized, is probably headed toward 6.5% by mid-2002.
The good news, if any can be gleaned, is that businesses, "by clearing their proverbial decks, 'fessing up to their mistakes and taking their lumps," are laying the groundwork for economic recovery, explains Mark Zandi, chief economist at West Chester, Pa.-based consultancy Economy.com. "The consensus has been that the recession will be over early next year, sometime in February, March or April," he says. "I think we're still on track for that."