The unemployment rate jumped in August to its highest level in four years, a government report said today, and that should put the fear of a sinking economy in the minds of consumers.
The jobless rate rose to 4.9% in August from 4.5% in July, the Labor Department said, reaching the highest level since September 1997. Economists polled by
expected the rate to edge up to 4.6%. Payrolls decreased by 113,000, compared with an increase of 13,000 in the previous month. The July figures were revised upward from a loss of 42,000 jobs.
Since October, the unemployment rate has tacked on a full percentage point. "That has got to take a toll on the consumer," said Christopher Low, chief economist at First Tennessee Capital Markets. "We've already seen changes in consumer behavior. In the past, people would spend whenever they got their hands on any kind of cash. But the tax rebates are not all being used for consumption."
Consumer credit fell for the first time in July since October 1997, which indicates that Americans are using their tax rebates from the government to pay down their debts, rather than to spend.
"This is a big psychological event," said Peter Kretzmer, senior economist at Banc of America Securities, referring to the surge in the August unemployment rate. "The
is going to be worried about consumer confidence and consumer spending."
The August reading on the University of Michigan's consumer sentiment index, an indicator monitored closely by the Fed, fell to 91.5 from 92.4 in July, as people expressed concerns about the future.
"Unless retail sales contradict today's result, and I can't think of why that would happen, the Fed is going to ease again," said Kretzmer. The fed fund futures contract, a good proxy for monetary policy, is pricing in a 100% chance of a 25-basis-point rate cut when the central bank meets on Oct. 2.
Hardest hit in August was the beaten-down factory sector, which dismissed 141,000 workers, nearly twice as many as in July. Virtually every manufacturing industry lost jobs, with industrial machinery and electrical equipment posting the steepest declines. Construction employment was little changed, however. And jobs in the service industry actually increased, led by healthcare providers.
Still, there has been no shortage of layoff announcements in August.
, for example, disclosed plans to cut up to 2,400 employees, or 11% of its workforce, as it suffers from low trading volume.
announced plans to ax 1,000 workers from its fiber-optic units and said it plans temporary shutdowns at two North Carolina plants.
Within the jobs report, average hourly earnings rose 0.3%, or 4 cents, to $14.38 in August from $14.34, in line with economists' forecasts. Average weekly earnings rose to $490.36 from $488.99. The pool of available workers rose to 11.8 million in August from 10.9 million in July.
Meantime, the Labor Department's diffusion index, which measures hiring trends around the country, fell to 43.6 in August from 45.3 in July, its lowest level since the recession of 1990. Below 50, the index signifies that more industries aren't hiring than are hiring.
"The job cuts are no longer isolated to technology," said Low. "Companies are cutting jobs as they did in the last recession."