Friday's report on the U.S. job market confirmed what many consumers have been sensing for months: that the slide in house prices and the rise in food and energy costs are taking a heavy toll on the economy.
With consumers gloomier than they’ve been in decades, the economy had seemed to be defying gravity. Tax rebates helped prop up surprisingly strong retail sales in May, and manufacturers are getting something of a reprieve from a weak dollar.
But the jobs data confirmed that it’s far too early to declare the recession bullet has been dodged. Some forecasters now have pushed back their estimates of how long it will take for the economy to get back on its feet.
The number of Americans out of work grew by 861,000 in May — to 8.5 million workers. The sent the jobless rate to 5.5 percent in May from 5 percent in April — the biggest one-month jump in 22 years.
The surprising jump spooked Wall Street, sending the Dow Jones industrial average down nearly 400 points. Stock traders also were reacting to soaring oil prices, which rose more than $10 a barrel in New York trading to a record of nearly $139.
The White House said President Bush is considering new measures to stimulate the battered economy, but officials said they recognize the administration has little time left to act.
Job losses cut through a wide swath of the economy, including big cuts in retailing construction and manufacturing. Until May, those industries had been holding up relatively well. Ongoing weakness in hard-hit regions of the country like the industrial Midwest showed signs of spreading.
“When you look at the regional data, it's a lot of different states and a lot of different metropolitan areas,” said Mark Zandi, chief economist at Moody’s Economy.com “It's really coast to coast. So it gives you a sense this job market is still very weak. And there’s no indication that it's starting to turn.”
More job cuts are on the way. In May, planned job cuts jumped to a 29-month high of early 104,000, according to a report from outplacement firm Challenger, Gray & Christmas. That’s up 15 percent higher from April and the highest since December 2005, when nearly 108,000 job cuts were announced. The biggest layoffs are coming in the auto and financial services industries. High fuel costs are also forcing airlines to cut jobs.
Reversing those losses will depend heavily on how well consumers hold up under the twin burdens of falling house prices and rising costs for food and energy. The home foreclosure rate hit a record high in the first quarter; more ominously, so did mortgage delinquencies, a warning sign that more foreclosures are coming. Though oil prices have recently backed off record highs, gasoline prices are closing in on a national average of $4 gallon — up 85 cents from a year ago. The jump in diesel prices from last year is approaching $2 a gallon.
It’s no wonder that consumers report that they’re gloomier than they’ve been since the tail end of the 1970s stagflation, when slow growth and soaring prices took a big bite out of every household’s spending power. Despite the current pessimism, consumer spending — which accounts for 70 percent of the U.S. economy — seems to be holding up. On Thursday, major retail chains reported surprisingly brisk sales for May.
That spending was likely financed, at least in part, by the early round of $100 billion in tax rebate checks hitting consumers’ mailboxes. As of this week, about half of those checks have been mailed, according to Jeoff Hall, an analyst at Thomson IFR Markets.
“But I think 100 percent of them have already been spent, meaning that people are pre-buying in anticipation of receiving those checks,” he said. “So I think the impact of the stimulus checks is going to be muted.”
Some of the tax rebate money is going to pay for higher gasoline and diesel prices. Drivers are shelling out roughly half a billion dollars a day more at the pump than they were when the measure was enacted in early February. Unless prices come back down, those higher fuel prices will have burned through the $100 billion stimulus package by the end of summer.
“The tax rebates are now being spent on staples and putting food on the table instead of large screen TVs,” said Diane Swonk, chief economist at Mesirow Financial. “That doesn't set well with us consumers and voters going into the November election.”
Pressure for additional government action is already building. On Friday, Rep. Barney Frank, D–Mass, and chairman of the House Financial Services committee, said it’s time for Congress to consider another round of stimulus checks.
“The first stimulus economic package helped, but we are still in trouble,” he told CNBC.
Consumers have other worries on the inflation front. Soaring prices for food and other commodities are pushing costs for companies that may soon show up in higher prices for goods and services. But wages aren’t rising nearly as fast as prices: Labor costs were up just 0.7 percent year-over-year in the first quarter. Friday’s employment report showed Americans' earnings rose 0.3 percent in May.
“Earnings have been either right at or just below the rate of inflation for some time now,” said Robert McTeer, distinguished fellow at the National Center for Policy Analysis and former president of the Federal Reserve Bank of Dallas. “And that's contributing to a lot of the angst out there."
Slow wage growth is bad news for consumers but good news for the Federal Reserve because it means the wage side of a possible wage-price inflation cycle has not taken hold. Meanwhile, the central bank is walking a tightrope between feeding inflation by making money too cheap on the one hand and raising interest rates too soon before the economy and credit markets have stabilized.
Fed Chairman Ben Bernanke delivered a speech this week that seemed to indicate inflation was currently the bigger concern; some investors took those remarks as a signal that central bankers were done with rate cuts for now.
But it’s premature to conclude that further rate cuts won't be needed to get the economy back on track, according to Robert Brusca, chief economist at Fact and Opinion Economics.
“I read it every way I could — never in that speech did I see him saying the Fed wasn't cutting rates anymore,” he said. “It's far too soon to say what the Fed is or isn’t going to do for the rest of the of year.”
Despite the string of job losses, the data on have yet to show that the overall economy is moving in reverse. That has touched off a debate over whether a recession has already begun — or whether the economy may yet dodge one by entering a prolonged period of slow but still positive growth. For most consumers — especially those added to the jobless rolls in May — the debate is academic.
“It's a technical argument,” said Zandi. “For the average American, this is a recession. They are worth less today, their purchasing power is lower — this is a recession. That's why consumer confidence is as low as the early '80s.”