Poor Jobs Outlook

Today’s jobs data reinforces the view that the economy is slowing down quickly. Here’s the release as reported by MarketWatch, a Dow Jones website:
Jobless rate jumps to 5% as payroll growth stalls

The point to raise here is that not only was job growth really weak last month, but that unemployment jumped so strongly from 4.7% to 5.0% in just one month. That kind of jump is very worrying and is the real reason we have to be concerned about the next few months: such sharp movements generally [but not always] happen during recessions.

This entire growth period, dating back to 2002 has been marked by very poor job generation – much worse than the 1990’s for instance – and yet still low unemployment, which is why today’s report of a sudden rise in unemployment is such a shock.

The present uncertainty surrounding the economy’s strength and the slow undermining of consumer confidence that goes along with it is beginning to be reflected across a wide array of indicators. Not consistently, but now fairly generally. The rot is setting in starting from the melt down in real estate. As an example: real estate construction has shed over 250,000 jobs since September 2006. The knock-on effect has yet to show up in the financial sector where all sorts of rumors are flying about of large lay-offs at the banks hit worst by the follies in the sub-prime lending market. The poor job data released today obviously does not contain any of those rumored lay-offs, so the overall situation is likely to get worse before it starts to improve again.

A worsening job market can only cause further damage top an already skittish consumer sector. If we combine a dicey employment outlook with the unravelling of the so-called “wealth effect” caused by continuing declines in house prices then the prospect for a slide in consumer spending becomes more real, and with it the chances of a recession increase.

Of course next month could show that today’s data was an aberration. Somehow I doubt that. The accumulating evidence is that the economy is significantly weaker than it was only a quarter ago, and the next two or three quarters are unlikely to show a strong bounce back because we have not yet seen the end of the credit crunch brought on by the stupidity of the financial markets and the total lack of regulatory response over the past six years. As long as more potential, and as yet unrecognized, losses lurk in the hidden corners of bank balance sheets the credit markets will remain on edge. While that happens the money to restore sanity in the housing market cannot flow, and hence the consumer will be forced to retrench.

In short we need some leadership from the regulators and from the administration to restore confidence. The chances of that happening are slim to none. Why would they get involved now when they’ve watched the ship take on water for years?

Hence the rocky outlook. Hence the need for caution. And hence the rising chance of a recession.