As they cope with rising food and energy costs and declining home values, more Americans took another financial hit in June: the loss of their paycheck.
The U.S. economy shed some 62,000 more jobs in June — the sixth straight month of losses. So far this year, the unemployment rate has risen from 4.9 percent at the beginning of the year to 5.5 percent in June — the highest level in more than three years.
Thursday's report also boosted the jobs cuts initially reported for May. The nation's payrolls now have shed 435,000 jobs since December.
More job losses are likely in coming months. Planned layoffs at U.S. companies last month were nearly 50 percent above year-ago levels, according to outplacement firm Challenger, Gray and Christmas.
"I think the (jobs) report tells us the economy is actually deteriorating," said John Ryding, former chief economist with Bear Stearns now with RDQ Economics. "The labor market seems to be getting worse."
Not surprisingly, layoffs are coming fastest in the sectors that have been hardest hit by the housing recession and credit crunch. The construction and financial services industries began shedding jobs last year and continue to do so. More recently, retailers, fearing a slowdown in consumer spending, have been cutting jobs too.
Boosted by a weak dollar, which makes U.S.-made goods more competitive overseas, the manufacturing sector has been holding up surprisingly well.
But that strength may be flagging. The Commerce Department reported Wednesday that orders to U.S. factories in May turned in the weakest performance in three months in May, as demand weakened for autos, heavy machinery and steel. The 0.6 percent monthly increase was less than half the gains in April and March and the poorest showing since a 0.4 percent drop in February.
For now consumer spending, the main engine of economic growth, is holding up based largely on a heavy dose of financial stimulus from a government tax rebate that pumped $100 billion back into household budgets. Last week the Commerce Department reported that disposable incomes jumped 5.7 percent in May — the biggest one-month gain since the government handed out checks to fight recession in May 1975.
As the downturn in the housing market has picked up speed, hundreds of billions of dollars in home equity — one of their biggest single sources of savings — has evaporated. Skyrocketing oil prices have sent the cost of gasoline surging. Prices of other goods have been rising faster than paychecks.
All of which has added to the strain on household budgets. Late payments on home equity lines of credit rose to a 21-year high in the first quarter of 2008, the American Bankers Association said Wednesday.
While strapped consumers certainly can use those stimulus checks, they’ve done little to bolster consumers’ confidence in what lies ahead. Falling home prices are eating into their financial cushion. Stock prices, as measured by the Dow Jones Industrial average, have fallen since October by nearly 20 percent, the threshold widely used to describe a bear market.
A string of interest rate cuts by the Federal Reserve have done little to prompt lenders to ease up on tighter credit after years of lax lending standards.
“In America we borrow to buy houses, to buy cars, to send our kids to school, to remodel our houses to take vacations,” said Peter Schiff, chief global strategist at Euro Pacific Capital, one of Wall Street’s gloomier forecasters. “What we’re seeing right now is that we can't pay this money back. The lenders are cutting us off and this whole bubble economy that we have is deflating."
Banks are also busy unwinding the heavy borrowing used to buy mortgage-backed assets that went bust. Almost a year after those losses first began sending the financial markets reeling, banks continue to post big losses and take huge write-offs. That contraction also is weighing on the job market. Citibank reportedly is cutting another 6,500 jobs in its investment banking unit after posting losses of $15 billion over the past two quarters.
Along with consumers, private economists also are getting gloomier. Many forecasters now concede that the economic recovery they had expected to see by the end of this year will take longer than they thought to materialize.
Though consumer spending helped the gross domestic product advance by 1 percent in the first quarter of this year, that positive momentum may be short-lived once the stimulus checks are spent. Goldman Sachs chief economist Jan Hatzius expects the economy to begin turning down late this year or early next, with the unemployment rate hitting 6.5 percent by the end of 2009.
Despite the concerns about a weakening economy, Fed policymakers signaled last week that they had begun to worry more about inflation. That could signal plans to raise short-term interest rates. Already, central banks around the world — including China, India, Russia and Brazil — have begun boosting rates to try to keep a lid on inflation. The European Central Bank to followed suit at its rate-setting meeting Thursday, boosting rates by a quarter point to 4.25 percent.
Higher rates overseas put further pressure on an already weakened dollar, which has drawn some of the blame for the rise in energy prices. Some economists think the Fed’s inflation fears are misplaced. Especially if the economy is headed toward a full-blown recession.
“You’re going to have slack in the labor markets, slack in goods markets and you’re going to have a reduction in commodity prices once the U.S. recession becomes global,” said Nouriel Roubini, and economics professor at New York University’s the Stern School of Business. “Inflation is not the problem the Fed has to face.”
A lot depends on how long the housing market remains stuck in reverse. With the spring selling season over, home prices have continued to fall, wiping out billions of dollars worth of consumer wealth. That’s why job growth is so important: With less home equity to fall back on, consumers have little cushion to offset the loss in wages that comes from losing a job.
With most rebate checks paid out, there appears to be little prospect of further government response to the worsening economic outlook. Despite a recent call for more offshore drilling from the White House, there has been little talk of a formal response to the surge in energy costs, despite concerns that oil and gasoline prices may remain stubbornly high for some time to come.
Meanwhile, Congress and the White House continue a year-long effort to pass a housing relief bill to try to head off an estimated three million more home foreclosures this year. Though both sides are hopeful of passing a bill before the summer recess, it remains to be seen how far the final version will go in providing relief to those at risk of losing their homes.