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Job Losses Suggest Economy Is in Recession •
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Sharp Drop in Jobs Adds to Grim Picture of US Economy
By Edmund L. Andrews
The New York Times
Saturday 08 March 2008
Washington - The worst fears of consumers, investors and Washington officials
were confirmed on Friday, as deepening paralysis on Wall Street collided with
stark new evidence of falling employment and a likely recession.
In a report that was far worse than most analysts had expected, the Labor Department
estimated that the nation lost 63,000 jobs in February. It was the second consecutive
monthly decline, and the third straight drop for private-sector jobs.
Even before the bad news on jobs emerged, the Federal Reserve was already racing
to ease the latest crisis in the credit markets, where seemingly rock-solid
companies have been caught short because the markets are devaluing the collateral
they had posted to back billions of dollars in loans. Much of that collateral
consists of mortgages.
In a surprise announcement early Friday, the Federal Reserve said it would
inject about $200 billion into the nation's banking system this month
- with more to come after that - by offering banks one-month loans
at low rates and in return letting them pledge mortgage-backed bonds and even
riskier assets as collateral.
Though monthly payroll data are notoriously volatile and subject to revision,
the jobs report was so bleak that many of the few remaining optimists on Wall
Street threw in the towel and conceded that the United States was already in
a recession.
"Godot has arrived," wrote Edward Yardeni, who had been one of
Wall Street's most relentlessly upbeat forecasters. "I've
been rooting for the muddling through scenario. However, the credit crisis continues
to worsen and has become a full-blown credit crunch, which is depressing the
real economy."
The convulsions in the credit markets were spurred in part when Thornburg Mortgage,
one of the nation's biggest independent mortgage lenders, and Carlyle
Capital, the offspring of one of the country's largest private equity
firms, failed to meet demands by lenders to post more cash or pledge other assets,
also known as margin calls, on debts that had been backed by packages of mortgages.
Fed officials said Friday that they were not pumping money into the system
in response to the poor jobs data but rather to the growing unwillingness or
inability of investors to finance even routine business deals. Fed officials
have long feared that anxiety about credit losses would create a "negative
feedback loop," or self-perpetuating spiral of rising unemployment, more
home foreclosures and yet more credit losses.
"You have big credit losses that make it harder to get new credit, which
means the economy starts to slow down and foreclosures go up," said Nigel
Gault, a senior economist at Global Insight, a forecasting firm. "Then
you get even bigger credit losses, which makes banks even less willing to lend
and you keep spiraling down."
The Fed's problem is that its main weapons against a downturn -
lower interest rates and easier money - are ill suited to a crisis that
stems from collapsing confidence about credit quality.
Even though the central bank sharply cut short-term interest rates twice in
January and clearly signaled that it would cut them again on March 18, rates
for home mortgages have risen and rates for many forms of commercial loans have
jumped sharply.
"There has been a tug of war under way between deteriorating credit conditions
and monetary policy," wrote Laurence H. Meyer, a former Fed governor and
now a forecaster at Macroeconomic Advisers. As a result, he said, credit conditions
have remained almost as tight as ever.
The darkening economic outlook, coming just nine months before presidential
elections, puts enormous pressure on President Bush and could pose a problem
for Senator John McCain, the presumptive Republican nominee for president. Typically,
the party in power has not been able to hold onto the White House when the economy
is in a recession in an election year.
President Bush, in a hastily arranged appearance before television cameras
on Friday afternoon, acknowledged that the economy had slowed but predicted
that it would get a lift this summer from the $168 billion stimulus package
of tax rebates and temporary tax cuts that Congress recently passed.
"Losing a job is painful, and I know Americans are concerned about the
economy," Mr. Bush said.
"The good news is, we anticipated this and took decisive action to bolster
the economy, by passing a growth package that will put money into the hands
of American workers and businesses."
Edward P. Lazear, chairman of President Bush's Council of Economic Advisers,
said the White House had downgraded its earlier forecasts but still believed
that the tax rebates of up to $1,200 for many families will help the economy
escape a recession.
"There is no denying that when you get negative job numbers, realistically
the economy is less strong than we had hoped it would be," Mr. Lazear
said. "The question is how quickly will it pick up. We think it will pick
up - as I mentioned, we think it will pick up by the summer."
Few private forecasters were so buoyant. Many firms had already concluded that
a recession was under way. Within minutes of the new report on employment, many
in the dwindling pool of optimists changed their positions.
Mr. Yardeni was hardly alone. Just one minute after the Labor Department published
its report at 8:30 a.m., JPMorgan Chase reversed its stance, declaring that
a recession appeared to have begun. Lehman Brothers switched its position as
well.
Unemployment typically starts to rise only after a recession has started, and
it keeps climbing for many months after the economy has hit bottom and begun
to recover.
Paul Ashworth, an economist at Capital Economics, noted that private-sector
payroll employment has now declined by an average of 47,000 a month -
a decline that has been followed by a recession every time it has happened in
the last 50 years. In each of those recessions, Mr. Ashworth added, the job
market recovered only after monthly job losses peaked at 200,000 jobs.
Ben S. Bernanke, chairman of the Federal Reserve, had already sent clear signals
in recent weeks that the central bank was ready to reduce the overnight federal
funds rate when policy makers meet on March 18.
Since August, the Fed has sharply cut overnight rates five times, to 3 percent
from 5.25 percent, and investors have been all but assuming that the central
bank would reduce them by at least another half a percentage point, and perhaps
three-quarters of a point, at the next meeting.
But by Thursday, Fed officials had become increasingly alarmed that rates for
many kinds of lending were skyrocketing as investors demanded steep risk premiums
that are normally associated with a serious economic recession.
What particularly alarmed Fed officials was that the margin calls on Carlyle
Capital and Thornburg Mortgage had stemmed from plunging confidence about the
value of highly conservative mortgages that were guaranteed by Fannie Mae and
Freddie Mac, the giant government-sponsored mortgage companies.
If investors lose confidence in Fannie Mae and Freddie Mac, which have become
the only major remaining source of mortgage financing in recent months, Fed
officials fear that home sales and housing prices could plunge further and foreclosures
could climb even higher than they already have.
On Thursday, the Mortgage Bankers Association reported that about 7.9 percent
of all loans - a record high - were past due or in foreclosure.
Until the third quarter of last year, the rate had not climbed above 7 percent
since 1979.
Home prices are falling in almost every part of the country, a phenomenon that
Fed officials and many other experts until recently thought was all but impossible,
and some analysts now predict that average home prices will ultimately fall
20 percent from their peak in 2006.
The effect is reducing household wealth. According to data this week from the
Fed, net household wealth declined by $900 billion in the fourth quarter of
last year.
Indeed, the ratio of homeowners' equity to the value of their homes fell
below 50 percent for the first time in history last year, according to the Fed.
Far more alarming, however, is that about 30 percent of all homes bought in
2005 and 2006 are "under water," meaning they have mortgages that
are higher than their resale value.
"We're at the beginning of the bursting of the housing bubble,"
said Dean Baker, co-director of the Center for Economic and Policy Research,
a liberal research organization in Washington. "The rate of foreclosures
is just going to increase as time goes on."
Eric S. Rosengren, president of the Federal Reserve Bank of Boston, noted that
the housing calamity thus far has occurred even though unemployment is still
low, at just 4.8 percent. But a surge in joblessness would almost certainly
lead to more foreclosures and more downward pressure on home prices.
"A downside risk that we do need to consider is whether a rising unemployment
rate generated by slow growth will force some people to sell their houses, creating
further downward pressure on housing prices," Mr. Rosengren said in an
interview.
In opening up its monetary spigots on Friday, the central bank left little
doubt that it wanted to increase the money for mortgage lending.
Its first move was to offer up to $100 billion through the Term Auction Facility,
a program created in December that allows any bank or savings and loan to bid
for loans at what amounts to wholesale rates and allows them to pledge a wide
variety of securities - including mortgage-backed securities that are
not tradable at the moment - as collateral.
The central bank's other new initiative is to lend an additional $100
billion in March through its open-market operations. That money is available
only to primary dealers, a few dozen major investment banks, but the loans can
be secured by certain mortgage-backed securities, like those issued by Fannie
Mae or Freddie Mac.
Fed officials said they were prepared to infuse even bigger sums of money into
the financial system if they see a need, and the central bank said it was in
"close consultation with foreign central bank counterparts" -
a hint that it might seek support from other central banks if the credit problems
persist.
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Job Losses Suggest Economy Is in Recession
By Kevin G. Hall
McClatchy Newspapers
Friday 07 March 2008
Washington - Recession fears mounted Friday after new data showed that employers
shed 63,000 jobs in February and a private-sector index pointed to sagging consumer
confidence amid sinking stocks and rising prices for oil and gasoline.
For the second consecutive month, employment was in negative territory, a trend
most often associated with recession. The Bureau of Labor Statistics also issued
a new count of how many non-farm payroll jobs were lost in January, boosting
it from 17,000 to 22,000 positions.
The losses stood in stark contrast to the forecasts of most mainstream economists,
who'd predicted an increase of about 25,000 jobs in February.
The steep job losses brought President Bush out for a statement in front of
White House cameras. He signaled that he's aware of the fiscal hardships that
Americans face and said that last month's economic stimulus package, including
tax rebates to consumers, should improve the economy in coming months.
"I know this is a difficult time for our economy, but we recognized the
problem early and provided the economy with a booster shot," the president
said. "We will begin to see the impact over the coming months."
Afterward, a Treasury Department statement sought to talk up the economy. With
oil hovering around $105 a barrel and the cost of wheat, corn and other commodities
driving up food prices, the Treasury stressed that the core inflation rate remained
contained at 2.5 percent.
It was an odd choice for positive news, since core inflation doesn't include
the high prices in the volatile food and energy sectors. In effect, this measure
of inflation ignores the record prices that Americans are paying at the gas
pump and the grocery store. The latest reading of the consumer price index,
which measures what Americans pay at the cash register, was almost double the
core rate and stood at 4.3 percent for the12-month period that ended in January.
While Bush and the Treasury Department avoided using the "R" word
- recession - the head of the president's Council of Economic Advisers
left open that possibility.
"We are going to have a weak-growth quarter, and whether you call that
a recession or not is something that we won't know for many months," Ed
Lazear, the council's chairman, said at the White House.
Many economists disagreed.
"Sure looks like a recession, with exports remaining the only bright spot
in the U.S. economy," John Silvia, chief economist for Charlotte, N.C.-based
Wachovia, said in a note to investors.
Later, in announcing a conference call to revise their forecast, Wachovia's
economic researchers wrote: "We now expect the U.S. has entered its first
recession in seven years, as economic activity likely contracted in the first
quarter."
Nigel Gault, chief U.S. economist for forecaster Global Insight in Lexington,
Mass., was equally blunt.
"The debate should no longer be about whether there is or is not a recession,
only about how deep it will be," he told investors. "Private employment
has now fallen for three months in a row, according to today's new data, with
the steepest decline in February."
Billionaire investor Warren Buffet, considered the richest man in the world,
said Monday that the U.S. economy already was in what would be a short recession.
A textbook definition of recession is two consecutive quarters of negative
economic growth. Recessions are dated after the fact by the National Bureau
of Economic Research, which defines recession as a significant decline in economic
activity spread across the economy and lasting over several months.
Friday's dismal jobs report makes it more likely that the Federal Reserve will
slash interest rates again at its March 18 meeting in a bid to prevent or shorten
a recession.
Wall Street, through the futures market, is expecting a three-quarters of a
percentage point cut, which would bring the benchmark federal funds rate to
2.25 percent. Banks would follow suit by lowering the prime rate to 5.25 percent.
Stocks dipped yet again Friday. The Dow Jones Industrial Average fell 146.70
points to close at 11,893.69. The S&P 500 was off 10.97 points to close
at 1293.37, while the NASAQ was down 8.01 points to 2212.49.
The job losses aren't yet in the hundreds of thousands associated with deep
economic turndowns. But job losses in consecutive months seldom happen outside
of recessions. The last such consecutive months of falling employment were in
May and June 2003, when the economy wasn't in recession.
Jobs also are a lagging indicator, providing a snapshot of past business activity.
And since recessions aren't called until the economy has been in one for months,
the dour job numbers clearly point to an economy that already was slowing drastically
when growth braked to just 0.6 percent during the final three months of 2007.
Problems in housing dominate headlines, but until late last year the broader
economy was in strong shape. Deepening problems in financial markets, however,
have dried up lending for businesses and consumers.
And consumers have pulled back since they've seen their wealth evaporate as
the stock market and home prices drop like stones. The RBC Cash Index, a survey
of consumer attitudes and spending by household, fell to 33.1 percent in its
March reading, announced Friday. That's the lowest since the index was created
in 2002.
Friday's jobs report gives a snapshot of which sectors of the economy are struggling.
Private-sector employment fell by 101,000 jobs, and the overall picture would
have been far worse if not for robust hiring by federal, state and local governments.
Manufacturing led the employment losers, shedding 52,000 jobs in February and
almost 300,000 jobs over the past 12 months. Construction employment fell by
39,000 posts and retail employment dipped by 34,000 positions.
Among industries that were hiring, government employment was up by 38,000 jobs,
the health-care industry added 36,000 posts and the leisure and travel sector
added 21,000 payroll jobs.
The nation's unemployment rate dipped a tenth of a percent to 4.8 percent as
more workers exited the economy. It's measured independently of the employment
report.
In separate news Friday, the Federal Reserve announced that it would make $100
billion in short-term loans available through two auctions this month. This
Trade Auction Facility is a new creation by the Fed that allows banks to bid
on short-term loans that have low interest rates. The Fed had been offering
$60 billion a month but has upped that to $100 billion to keep banks offering
short-term credit to corporations.
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