A sharp and surprising jump in the unemployment rate reported Friday makes it likely the economy will remain front and center in a hotly contested presidential campaign just entering its final stage.
The unemployment rate in August jumped to 6.1 percent, the highest level in five years, from 5.7 percent in July, the government reported. Businesses cut 84,000 jobs — the eighth month in a row of shrinking payrolls.
The economy already was the No. 1 issue for voters, but the increase in the psychologically important jobless rate ensures both Sens. John McCain and Barack Obama will have to continue to address the nation's economic troubles as they stump for votes over the next two months.
Battered by the housing slump and credit crunch, the economy has lost some 605,000 jobs so far this year. Friday’s report included revised data for previous months, showing much bigger job losses for June and July.
Initially contained to a few hard-hit sectors like construction and financial services, the weakness in the job market has now spread to most industries. Factories in August cut 61,000 jobs, professional and business services slashed 53,000, construction firms shed 8,000, retailers cut 20,000 and the leisure and hospitality industries lost 4,000. The only sectors adding jobs were government, education and health.
“The thing to be most concerned about is the fact that the job losses are now not just concentrating on construction anymore,” said Mark Zandi, chief economist at Moody’s Economy.com. “They're coming across all sets of industries, and that means that this thing can become self-reinforcing. And that's the real risk.”
The accelerating pace of job losses has reinforced the slumping economy as the top concern among voters. But it's not clear that either candidate can have much short-term impact on the economy. Much of the economic debate on the campaign trail has centered on differences in tax policies.
Specific proposals to spur growth involve increased government spending on everything from developing alternative energy sources to rebuilding crumbling roads and bridges. But both candidates' proposals would increase the national debt. The candidates have been largely silent on the huge financial strains soon to hit Social Security and Medicare.
Some of the thorniest economic problems are outside the candidates' control: Rising inflation is being fueled by increased global demand for commodities from corn to steel. The mortgage meltdown and resulting credit crunch are proving stubbornly resistant to the Federal Reserve’s efforts to push large quantities of money into the financial system. Job cuts lost to globalization will not be easily restored.
For now, the best hope is that the Fed’s deep cuts in interest rates will help pull the housing market out of its slump before higher food and energy costs spark a persistent bout of inflation.
The Fed is also hoping that a weak economy will slow demand, keeping inflation in check. On Wednesday, the Fed released its “beige book” report, in which nine of its 12 regional districts reported the economy remained weak.
After Friday’s jobs report was released, both campaigns were quick to acknowledge voters’ economic concerns.
“While millions of Americans are gathering around the kitchen table and questioning how they can keep their homes, pay their medical bills and afford their children's education, Washington has failed to act,” said McCain, who formally accepted his party’s nomination Thursday. “As I promised last night, I will fight for those that lost their jobs, savings and real estate investments.”
In his statement, McCain said he would promote a “Jobs for America economic plan that creates jobs, helps small businesses, expands opportunities and opens markets to American goods.” He also said “the last thing we should do is raise taxes as Barack Obama plans to do and has done. The American people cannot afford a Barack Obama presidency."
The Obama campaign shot back, saying McCain is “intent on continuing the economic policies that just this year have caused the American economy to lose 605,000 jobs” and noted that “the typical working age family's income is down $2,000 since George Bush took office, and their purchasing power is as low as it's been in a decade.
“John McCain's answer is more of the same: $200 billion in tax cuts to big corporations and oil companies, and not one dime of tax relief to more than 100 million middle-class families,” Obama said in a prepared statement. “If I am president, I will cut taxes for 95 percent of all working families and provide an immediate $50 billion to struggling states so that they don't have to cut back on health care and education and can rebuild roads and schools.”
So far this year, the economy has held up surprisingly well, given all the headwinds.
One reason may be the continued gains in productivity of American workers. The Labor Department reported Thursday that in the second quarter productivity rose at an annual rate of 4.3 percent.
That’s great news for the Fed because it relieves some of the inflation pressure brought by rising commodity prices. Higher productivity means companies can make more of their product for the same cost, which helps them absorb some of the higher cost of raw materials.
But it’s not great news for American workers who are, in effect, working harder for the same wages. In fact, the report showed that unit labor costs fell a half-percent in the second quarter. The number of hours worked shrank by 0.8 percent, and wages, when adjusted for inflation, fell by 1.3 percent. That helps explain why, even as the economy has been able to post weak growth this year, American workers feel like they’re losing ground.
Job losses are expected to continue for the remainder of the year, according to Joel Prakken, chairman of Macroeconomic Advisers.
“We do view the economy as facing very significant challenges in the second half of the year,” he said, “particularly the consumer sector where house prices are still falling, equity prices are low, gasoline prices, while falling recently, are still high, and labor income, given these employment reports, is falling.”