
A jump in the unemployment rate to 6.1% in August, the highest in nearly five years, underscored the economy's fragility and deepened political debate over whether a second stimulus package is needed.
The jobless-rate jump, from 5.7% in July, was larger than anticipated, reflecting how energy prices and problems in the housing and financial sectors have radiated outward to slow overall economic activity.
Nonfarm employers shed some 84,000 jobs, after revised net declines of 60,000 in July and 100,000 in June, according to a Labor Department survey. That brought net job losses so far in 2008 to more than 600,000.
"It's clear at this point that businesses are battening down the hatches and worried about the persistence of this slowdown," said Bank of America senior economist Peter Kretzmer. "They may be preparing themselves that this won't be something that ends quickly."
Barack Obama seized on the job numbers to push his plan for $115 billion in federal stimulus. It would include $65 billion in rebates for middle-class earners and $50 billion divided between infrastructure spending and money for states and local governments. Democrats are expected to propose something along these lines when Congress reconvenes Monday.
"People are anxious because of the kind of statistics you see released today," the Democratic presidential nominee said at a glass factory in Duryea, Pa.
Although a senior adviser to John McCain said the Republican nominee wouldn't take a stimulus plan "off the table," Sen. McCain is focusing on tax cuts, instead, as a key to recovery. "All you ever asked of government is to stand on your side, not in your way, and that's what I intend to do," he said at a rally in Cedarburg, Wis.
On Wall Street, the job losses sparked concern that housing markets would continue to slide because more people would have trouble meeting mortgage payments. "What started with the housing market and turned into the credit crisis is now turning itself into an old-fashioned unemployment-led slowdown," said Saumil Parikh, a portfolio manager at bond specialist Pimco. The result could be a "negative feedback loop," he said: "As unemployment goes up, you'll see more forced sellers."
For much of the year, many on Wall Street had expected its losses from bad mortgage-related investments to diminish in the fourth quarter. Now such forecasts are in doubt. And many analysts also doubt stocks can stage a lasting rebound until there's convincing evidence the worst is over for financial firms.
When the jobless report first came out Friday, the Dow Jones Industrial Average slid more than 150 points, but it ended the day up 0.3% at 11220.96. The Dow's nearly 345-point fall on Thursday was largely attributed to anticipation of grim job news. The Dow was down 2.8% for the week amid worries about the global slowdown.
The Federal Reserve has sought to prop up the economy by cutting short-term interest rates, to 2% from 5.25% a year ago. But the Fed isn't expected to make further cuts, because it's concerned about inflation, too.
Indeed, speculation has focused more on when the Fed might raise rates. Such a move got less likely after Friday's jobs report. Economists at J.P. Morgan predicted the Fed will begin raising interest rates in the fourth quarter of 2009; previously, they had projected a first-quarter 2009 move. Other forecasters expect the Fed to stay on hold until at least the spring.
With the Fed effectively out of ammunition for stimulating the economy, at least for now, that leaves fiscal policy: tax cuts or government spending. Many economists credit the $168 billion stimulus package passed in February with helping stabilize consumer spending in subsequent months. Fed Chairman Ben Bernanke essentially endorsed that package, helping ease its way through Congress.
This time, the decision is tougher. Many economists are unsure whether another package is needed, thinking that past stimulus and the Fed rate cuts actions may be sufficient.
Mr. Bernanke hasn't taken a firm position. In July, when he last addressed the issue, he said he needed "a bit more time" to gauge the effects of the first stimulus round, while saying "we should consider all options."
He especially expressed doubt about the wisdom of more infrastructure spending -- a central plank of Democratic plans -- unless the funds could be injected immediately into the economy. Mr. Bernanke and many other economists worry that stimulus spending, if delayed in Congress, could come when the economy is already in recovery and essentially be wasted.
Even so, the employment report is bound to give a boost to those, like Sen. Obama, who want a new round of stimulus. The last time unemployment rose so sharply late in an election year, in 1980, the deteriorating economy helped Ronald Reagan unseat Jimmy Carter. But the political lesson of that year is ambiguous. While Mr. Reagan won as a challenger to the party in power, the position Sen. Obama is in, Mr. Reagan came in promising big tax cuts, an agenda that Sen. McCain is trying to follow.
Polls consistently show voters prefer Sen. Obama on economic issues. Congress is considered unlikely to pass a stimulus package this month, as Sen. Obama says it should. Even so, his campaign senses a big opportunity to use the stimulus proposal to show how activist government could help the economy.
Sen. McCain's chief economic adviser, Douglas Holtz-Eakin, said a second stimulus package could be wasted because the economy suffers from fundamental problems that need to be fixed. He said that unless the financial sector rebounds, the economy will remain weak, and short-term spending or tax cuts probably won't do much good.
Citing a decade of economic decline in Japan, despite heavy infrastructure spending, the McCain adviser said: "Straight fiscal measures in absence of getting credit markets functioning again" are ineffectual. He said Sen. McCain wants to extend and reform unemployment insurance.
The political positioning is scant comfort to people like Ahtreb McFee in Detroit, who lost a hospital job paying $15.85 an hour in June 2007 has been out of work since. The 35-year-old is struggling to keep her house, which is in foreclosure, and says she recently could barely afford to buy her 13-year-old son a school uniform and a haircut.
"I'm eager and willing and want to work, but there are no jobs," said Ms. McFee, adding that she has been turned down by fast-food restaurants, which tell her she is overqualified.
The job cuts in August hit across the economy. Manufacturers eliminated 61,000 positions, the most in a month since July 2003. Business and professional services lost 53,000 jobs. Employment in retail trade fell for the ninth month in a row.
Construction employment fell by less than in previous months. But service-sector employment, which has often bucked the downward trend, declined in August. On the plus side, health care and education added 55,000 jobs, while government payrolls grew.
Separately, the National Federation of Independent Business reported that there hasn't been any job growth overall in the past few months in small businesses, according to a survey of 812 companies.
Source: Wall Street Journal
Labels: Economy