January 08, 2008 |
|The good news is that the Federal Reserve will continue to lower interest rates by another percentage point, if not more, while Congress and the president are considering adding a dollop of fiscal stimulus as well. The bad news is that the credit markets are still frozen and the economy is weakening rapidly with the release of each new statistic.|
Take employment, for example. While the 0.3 point jump in the unemployment rate to 5% in December, the highest level in over two years, received the most attention, the fact is that the labor market is in even worse shape than this implies.
On the employment side, the 18,000 jump in nonfarm payrolls was not real, but was a product of the Labor Department's seasonal adjustments. The number of people on business payrolls last month actually fell by a whopping 339,000.
To make matters worse, this includes what the BLS calls a "birth/death" adjustment. That is - it includes 66,000 people assumed by the BLS to have been added to payrolls last month as a result of new business incorporations minus business failures.
Without this extrapolation (which, as you can imagine, is subject to revision once the Labor Department finds out how many net new businesses were formed and how many people they actually hired), the unadjusted payroll figure would have fallen by 405,000.
Even worse are the figures emanating from the Labor Department's survey of households. In December, the number of people considered unemployed shot up by 474,000 - one of the biggest monthly increases in this series in recent memory.
Getting back to Labor's "birth/death" adjustment, it apparently accounted for nearly 90% of payroll growth the department reported for last year. In other words - it is entirely possible that when the actual number of new jobs created in 2007 is toted up by the department it may very well have been significantly less than originally reported.
Another sign of softness in the labor markets can be found in the number of hours put in on the job. While the average work week has held steady for the past five months, more people are being asked to work fewer hours, and thus are receiving cuts in their take-home pay.
Since we already know that households are being slammed by higher food, energy and health care costs combined with soaring debt, low savings and declining home prices, this drop in jobs and incomes removes the last prop from under consumer spending and thus the economy.
Little wonder that the various surveys of consumer sentiment have been reporting a dour attitude with concerns over jobs growing month by month. And small wonder that the holiday shopping season turned out to be a dud See Oct. 1 column
With consumer spending now accounting for a record 71% of our gross domestic product, it will take a whopping increase in business spending and exports to keep the U.S. economy out of recession.
On the bright side, however, this developing softness in the economy will put the kibosh on rising inflation - as evidenced by the drop in oil prices over the past few days.
After all, no one is immune from the law of supply and demand - not even the oil-producing countries.