The jobless rolls were filling up even before the terrorist attacks on Sept. 11. And it looks like consumer spending, once the stronghold of the U.S. economy, is now hanging by a thread.
"If you had looked at this report and said it was a post-Sept. 11 report, nobody would have argued with you," said Peter Kretzmer, senior economist at Banc of America Securities. "The real question is whether this is the beginning of a few months of layoffs that would be the deepest part of the slowdown, or whether it's the beginning of a more sustained period of consumer spending decline."
The more than 200,000 layoffs in the airline and travel industries that occurred after the Sept. 11 attacks won't show up before the October report. But this morning's numbers were at least a snapshot of an already slowing economy. The government said employers cut nonfarm payrolls by 199,000 last month, the largest amount since February 1991, when the country was in a recession, compared with an estimate of a 100,000 decline. The unemployment rate stayed at 4.9%, unchanged after a spike in August.
Wage gains slowed, as average hourly earnings rose 0.2%, down from a 0.5% increase in August. On Thursday, the weekly jobless report showed that the number of Americans filing initial claims shot up 71,000 to 528,000 in the week ended Sept. 29, the highest level since July 1992.
Signed, Sealed, Delivered
Many economists are predicting that the unemployment rate in October could surge to 5.3% or higher. "I've maintained that [unemployment] was the greatest threat to consumers, but obviously that was prior to Sept. 11," said Richard Berner, chief U.S. economist at Morgan Stanley. "Sept. 11 just sealed the fate of both the consumer and the economy," Berner added, pointing out that he's estimating a 1.6% decline in retail sales for September, which would be the biggest decline in 10 years.
The worst attacks on American soil have taken a sharp toll on sectors like tourism, entertainment and travel. These industries were already suffering even before the attacks, as evidenced by this morning's jobs report. While the heaviest job losses came from the manufacturing sector, layoffs in the retail trade and service sector were significant. About 102,000 jobs were lost from the sector, of which 44,000 were in retail. Amusement and recreation employment also fell sharply in September.
Current savings and debt levels suggest people may be unprepared to deal with layoffs. Personal saving levels, excluding stock and capital gains, have risen to about 4% of income from a low of 1% as a result of the government's tax rebates. But they're still low, especially compared with debt levels, which have been rising, according to
Federal Reserve Board statistics.
"If anything, the problem is clearly that consumers are going to cut back," said Kretzmer. "The degree and duration of that cutback has to do with whether this is a severe or a light recession." Kretzmer estimates the gross domestic product will contract by 1.7% in the fourth quarter, but that first-quarter GDP growth could be slightly positive.
Faith, Hope and Austerity
The current slowdown has been compared to the recession in 1990 and 1991, where the unemployment level got as high as 7%, and the U.S. was fighting a war. While terrorism now adds a similar, if not greater, measure of political instability to the overall picture, some believe there are reasons for optimism.
For one, the combination of Fed rate cuts, tax rebates, and fiscal aid package from the U.S. government, should work to boost consumer demand, said David Jones, chief economist at Aubrey G. Lanston. Jones expects a "strong recovery" in the second half of next year. James Glassman, senior economist at J.P. Morgan, disagrees with anyone who thinks the "Fed is pushing on strings," as signs abound that lower interest rates are having their intended effect on the economy. With falling mortgage rates, refinancing activity has "exploded back to record levels," and applications to buy new homes have soared, said Glassman.
The Fed slashed interest rates for the ninth time this year on Tuesday, and the consensus calls for interest rates to fall to as low as 2% by the end of the year. "We're in a very different environment from 1990 and 1991," agreed Kretzmer, noting that monetary and fiscal policy moved "very gingerly" back then, with government facing very big fiscal deficits. In addition, oil prices are now much lower, in contrast to the situation in 1991.
There's still reason to doubt whether all this will placate the consumer and boost spending. "The economy's new woes are rooted primarily in powerful psychological forces that can't be fixed by the Fed," wrote Tony Crescenzi, chief bond strategist at Miller Tabak, in a recent article on his site BondTalk.com. For one thing, he says, interest-rate cuts "won't put people back in airplanes" until "personal security has been enhanced."
Yi Ping Ho
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