The economy is now shedding jobs at an annual pace not seen since the recession of 1982 – America's worst postwar contraction.
This time, unemployment is skyrocketing as consumers retrench and major structural changes convulse the economy. And there are signs that joblessness will worsen in the months ahead.
On Friday, the government reported the unemployment rate rose to 7.2 percent in December. Businesses pink-slipped 524,000 workers that month, after letting go of 584,000 employees in November. The decline for all of 2008 was 2.6 million jobs, the most since 1945.
"What we are seeing is a portrait of an economy that is cratering," says Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh. "This explains why holiday sales were so weak, with people so concerned about their jobs, and why consumer confidence is so low."
The sharp rise in the jobless rate illustrates the challenge for the incoming Obama administration and has important policy implications, economists believe. It may prompt Congress to move more quickly on President-elect Obama's proposed stimulus package and quiet Republican concerns about the soaring budget deficit. It may also mean that the Federal Reserve, which has lowered interest rates to nearly zero, has to resort to more nontraditional ways to stimulate the economy.
"This time around if we want to get the economy turned around we may need policies that are much more aggressive," says Lyle Gramley, a former Fed governor and now a senior adviser at Stanford Group in Washington. "We may need to look for nontraditional monetary policy to get the job done."
On Thursday, Mr. Obama warned that it was essential for Congress to act on his economic stimulus package. In a sobering assessment, he warned that otherwise, the US economy might begin a downward spiral that could last years.
"Obama's on the right track, if it's not turned around it could go on for a long time," says Mr. Gramley.
The government jobs report suggests that workers cannot expect much respite in the months ahead. For example, business reduced the number of workers' hours on the job. "This is often a leading indicator of future job losses," says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. "It certainly shows we have not bottomed out and we are some distance from it."
Gramley is concerned that the rising level of unemployment will create a "negative feedback loop," where consumers, fearing for their jobs, reduce their spending. Businesses, watching inventories rise and sales fall, then cut payrolls. "It becomes a vicious cycle," he says.
Economists are bracing for more contraction in the months ahead. In the fourth quarter of last year, Gramley believes the economy contracted by a 6 percent annual rate. In the first quarter, he predicts it will shrink by another 4 percent to 5 percent.
"These are very large declines," he says.
Advocates for the jobless hoped the rise in the unemployment rate to 7.2 percent would make an impression on Congress, which may not have the stimulus package ready until mid-February. "We had hoped the stimulus package would be on the president's desk by the time of his Inauguration," says Andrew Stettner of the National Employment Law Project in New York, which advocates for jobs. "We don't have time to wait and need to get some money out into the economy – there is a human toll taking place here."
His concerns resonate with Carol Spach, a Concord, Mass., resident who has been out of work since November 2007. Ms. Spach, who worked in print marketing for an information-technology publication, calls the job market "very tough."
She is now hoping to land a job in fundraising. "They want people with experience," she says. "But I am still plugging away, trying to make contacts."
However, an increasing number of workers are now dropping out of the work force, afraid there are no jobs for them. "If you look at a broader measure of unemployment, discouraged workers, people who are working part time involuntarily and those who would take a job if it were available, that rate rose to 13.5 percent, up from 12.6 percent in November and up from 8.5 percent a year ago," says Mr. Brown.