Last month, businesses across the country handed out pink slips at a dizzying pace.
Restaurants, computer manufacturers, plastic producers, and furnituremakers were part of a massive downsizing of the US workforce, the sharpest one-month reduction in working Americans in 34 years. At the same time, those with jobs are seeing their hours reduced and overtime cut back - a bad omen for the rest of the holiday retail season.
On Friday, the Department of Labor reported that the United States lost 533,000 jobs in November and that the unemployment rate rose from 6.5 percent to 6.7 percent. The service sector accounted for 70 percent of the job losses. In addition, the department revised upward the job losses in September and October by a combined 200,000 jobs. In three months, the economy has lost 1.2 million jobs.
“This is stunning - in the sense of a deer caught in the headlights,” says Stuart Hoffman, chief economist for PNC Financial Services in Pittsburgh. “We are seeing a total collapse in consumer confidence in the economy and business is laying people off and not hiring.”
There are major policy implications for the job losses:
- When the Federal Reserve meets on Dec. 15 and 16, economists expect the central bank to drop interest rates by half a percentage point, which will take short-term interest rates to 0.5 percent. Foreign central banks are also likely to cut interest rates.
- Pressure will rise for Congress to enact a massive fiscal stimulus package to try to create jobs.
- The new jobs report is also expected to push Congress to provide a bailout for the auto industry, because any auto company failure could create yet more economic weakness. Executives of the Big Three testified before Congress on Thursday and Friday and Congress is expected to consider helping them this week.
The sharp drop in jobs is also causing economists to scale down their estimates for economic growth for this quarter and into next year. Before the jobs numbers were released, economists had anticipated that the economy would shrink 2 to 3 percent this quarter (when measured in terms of gross domestic product). On Friday, John Silvia, chief economist at Wachovia Economics Group, said he now thinks GDP will contract by 5 percent.
The job losses also are likely to mean that although Americans turned out for Black Friday, the heavy shopping day after Thanksgiving, they will not be hitting the malls in any significant way for the rest of the holiday season. The Labor Department reported the average work week fell to the lowest level since it began tracking the information in 1964.
Using the jobs data, Mr. Silvia estimates disposable income plunged about 8 percent in the third quarter and is flat in the fourth quarter.
“The disposable income numbers are the most devastating, because it looks like that number will be flat to negative in the fourth quarter,” says Silvia. “No matter what people said they were doing on Black Friday, this number says people don’t have money to spend.”
The new jobs numbers also suggest a worsening outlook for the economy next year. Mr. Hoffman has lowered his 2009 estimates from a decline of 1 to 2 percent in real GDP to a decline of 2 to 3 percent. “We are probably a third of the way through a significant decline in GDP,” he says.
The falling GDP is likely to be a topic of conversation when the Federal Reserve meets Dec. 15. “The Fed is going to pull out all the stops,” says Hoffman, who expects the central bank to drop short-term interest rates by half a percentage point. That would bring the federal funds rate to its lowest level since the 1950s. On Friday, panicked investors continued to snap up short-term Treasury bills, considered a safe investment, driving the yields down close to 0 percent.
The jobs numbers will dramatically increase the pressure on Congress to pass a massive fiscal stimulus package as soon as President Bush leaves office, says economist Nigel Gault of IHS Global Insight. “We had assumed a $550 billion package over three years – we will need more than that,” he wrote in a note to clients. The challenge, he says, will be making it effective quickly, since infrastructure projects take time to gear up.