Jobless rate in U.S. jumps up to 4.9%

THE BALTIMORE SUN

The U.S. unemployment rate swelled to a larger-than-expected 4.9 percent in August, sending stocks spinning and boosting the odds of more Federal Reserve interest rate cuts in hopes of resuscitating a badly wheezing economy.

The increase from 4.5 percent in July to 4.9 percent last month was the biggest jump in 15 years, said a report released by the Labor Department yesterday. Economists had expected an increase to only 4.6 percent.

Only a day earlier, the Commerce Department said that the Gross Domestic Product - the key measure of the country's economic output - advanced at a snail-like pace of 0.2 percent in this year's second quarter, the slowest in eight years.

The GDP and unemployment reports were merely the latest in a string of troublesome reports on the U.S. economy's health.

"When are they going to call this a recession?" asked David Citron, a managing director for the local office of Carret and Co., a money management firm.

Blue-chip stocks took a whipping as investors worried that the rising pace of layoffs would dampen the confidence of consumers - whose willingness to keep spending in the face of the U.S. economy's slowdown is all that has kept the nation from dropping into its first recession in a decade. But technology stocks escaped largely unscathed.

The Dow Jones industrial average plunged 234.99 points, or 2.39 percent, to close at 9,605.85. The broader Standard & Poor's 500 fell 20.62 points, or 1.86 percent, to finish trading at 1,085.78. The Nasdaq composite index fell 17.94 points, or 1.05 percent, to end the day at 1,687.70.

"This [unemployment report] is going to weigh on consumer confidence and spending, which isn't good for corporate profits and therefore isn't good for stocks," said Kevin Logan, chief market economist at Dresdner Kleinwort Wasserstein in New York City.

In terms of August jobs, the big loser continued to be the U.S. manufacturing sector. Factory employment fell by 141,000 last month, after a drop of 71,000 in July. August was the 13th straight month the nation's factory ranks shrank.

"Nearly 1 million manufacturing jobs [have gone] away" in the past year, said Pradeep Ganguly, chief economist for the Maryland Department of Business and Economic Development.

Worse still, the slowdown finally appeared to be seeping into the service side of the U.S. economy, analysts said. That's the dominant portion - about 80 percent - of the economy, so a service-sector slowdown is especially troubling because it would be sure to tip the country into a full-fledged recession, experts say.

"That we had recessionary conditions in manufacturing is old news," said Thomas F. Carpenter, chief economist for ASB Capital Management in Washington.

"But that [the slowdown] has since spilled into the non-manufacturing sector [would shatter] the frail expectation that there was in place a wall separating the receding manufacturing sector from the service side" of the economy.

A service-side slowdown would ramp up the layoff rate, slashing consumer spending, pummeling corporate profits and sending stocks down even lower, some analysts concede. The result: a recession that defies the consensus forecast for a slow-but-steady economic recovery next year that throttles up to a healthy pace of growth in 2003.

Overall, employment in services advanced by 23,000 in August, led by hiring at hospitals and other health care facilities. But that was only about one-third of the job growth in July, when 74,000 service-sector jobs were added.

There were several other bothersome developments. Retail employment dropped by 26,000 last month, after a jump of 35,000 in July, partly because retailers were cutting costs - along with the prices of their wares - in preparation for a possible spending slowdown by consumers. And employment in computer services fell last month for the first time since February 1988.

In the past five months, service-sector employment growth has decelerated to an average rate of 10,000 new jobs per month, well below the monthly averages of 93,000 last year and 131,000 in 1999, according to the Labor Department.

The double whammy of declining job growth in both manufacturing and services is stoking fears in Washington, where President Bush met yesterday with anxious Republican leaders.

"The slowdown is real, and it's affecting too many lives and we're concerned about it," Bush said at the White House after that meeting.

The administration is counting on federal tax rebate checks to consumers, along with the central bank's aggressive rate-cutting campaign, to revive the ailing economy. Republicans are watching the economy closely, knowing that rising layoffs could cause problems in next year's midterm elections.

However, Democrats sought to tie the rising unemployment rate to the White House and the dwindling federal budget surplus.

"It's a reflection, unfortunately, of the Bush budget and Bush economy," said Senate Majority Leader Tom Daschle of South Dakota.

Economists say the jump in unemployment might well force the Federal Reserve back into action - possibly even before next month, when central bank policymakers are next scheduled to meet.

The Fed has cut short-term interest rates seven times this year, taking the benchmark overnight lending rate down to 3.5 percent. That has brought commercial banks' prime lending rate down to 6.5 percent, which the central bank hopes will make it cheaper and easier for consumers and companies to borrow money, in turn fueling a rebound in the economy.

The rate cuts, in conjunction with the well-timed tax rebate, will help, but more is needed, said ASB's Carpenter. Though it has remained in positive territory, GDP growth has declined for two straight quarters and has been exceptionally weak for four consecutive quarters.

What's more, when the unemployment rate rises by half a percentage point from its low, the U.S. economy is typically on course for a recession, Carpenter said. And that has already happened: With yesterday's report, the U.S. unemployment rate has now risen a full percentage point from its trough of 3.9 percent.

The Fed might well have to bring interest rates down another full percentage point to avoid more serious economic woes, Carpenter said. And leaders of other countries might have to take a page out of this country's economic playbook, since the slowdown is spreading around the globe like an ominously dark, growth-choking cloud. Key countries such as Germany, Japan, Taiwan and Singapore are all facing serious slowdowns of their own.

"The point is, the malaise seen in the U.S. is rooted in the global economy," Carpenter said.

Wire reports contributed to this article.

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