Job Losses and Oil Surge Spread Economic Gloom
NY Times
Published: June 7, 2008

The unemployment rate surged to 5.5 percent in May from 5 percent — the sharpest monthly spike in 22 years — as the economy lost 49,000 jobs, registering a fifth consecutive month of decline, the Labor Department reported Friday.

The weak jobs report, coupled with a staggering rise in the price of oil — up a record $10.75 a barrel to more than $138 — unleashed a feverish sell-off on Wall Street, sending the Dow Jones industrial average down nearly 400 points. The dollar plunged against several major currencies.

Investors' recent hopes that the United States might yet skirt a recession sank swiftly in the face of gloomy indications that the economy is gripped by a slowdown and pressured by record fuel prices.

For tens of millions of Americans struggling to pay bills, the jobs report added an official stamp of authority to a dispiriting reality they already know: A deteriorating labor market is eliminating paychecks just as they are needed to compensate for the soaring cost of food and fuel, and as the fall in house prices hacks away at household wealth and access to credit.

"It's unambiguously ugly," said Robert Barbera, chief economist at the research and trading firm ITG. "The average American already knows that gas prices are up a ton and it's really hard to find a job. Sally and Sam on Main Street are already well aware of this, and that's why sentiment surveys are lower than they were in each of the last two recessions."

President Bush acknowledged the jump in unemployment as an indication of "slow economic growth," but he held out hope that $100 billion in tax rebates now being distributed to American households would spur spending and generate jobs.

"We're beginning to see the signs that the stimulus may be working," Mr. Bush said during a swearing-in ceremony for the housing secretary, Steven C. Preston.

In a presidential election year in which the economy has emerged as a crucial issue, both major candidates used the employment data as an opportunity to criticize their opponent's governing philosophy.

"The wrong change for our country would be an economic agenda based upon the policies of the past that advocate higher taxes," said Senator John McCain, Republican of Arizona, in a written statement. "To help families at this critical time, we cannot afford to go backward as Senator Obama advocates."

Senator Barack Obama, Democrat of Illinois, called the labor report "a reminder that working families continue to bear the brunt of the failed Bush economic policies that John McCain wants to continue," in a statement. "We can't afford John McCain's plan to spend billions of dollars on tax breaks for big corporations and wealthy C.E.O.'s."

Democrats on Capitol Hill and advocates for the unemployed pointed to the spike in joblessness in arguing for the swift extension of federal unemployment insurance.

Among the 8.55 million people who were unemployed in May, 1.55 million had been unemployed for 27 weeks or longer. Unemployment benefits now expire after 26 weeks. An Iraq war financing bill approved by the Senate includes a provision that would extend cash benefits for an additional 13 weeks.

"It would show a new level of callousness by Congress, a new level of disconnect between Washington and the rest of the country, not to pass an extension now," said Andrew Stettner, executive director of the National Employment Law Project, an advocacy group.

The White House has said it would veto the bill for imposing deadlines on the withdrawal of troops from Iraq. The administration also argues that jobless benefits should not be extended, with the unemployment rate still low by historical measures. Tony Fratto, a White House spokesman, said Friday's report did not change that position.

The spike in joblessness significantly cooled talk that the Federal Reserve could stop worrying about recession and might soon begin to raise interest rates to choke off rising prices for crucial goods like gasoline and food.

Since last fall, as fears of recession have grown along with the financial turmoil resulting from falling home prices, the Fed has cut interest rates to encourage investment and spur economic activity. A chorus of economists has warned that the Fed has unleashed too much easy money, feeding inflation and driving down the dollar. Some have suggested the Fed might have to reverse course and raise rates. Not anymore, as the labor market continues to offer up evidence of enduring trouble.

"There's a greater chance of peace breaking out in the Middle East," said Mr. Barbera, the ITG economist.

The report fleshed out how economic troubles that began with falling home prices have rippled out to other areas of the economy — to shopping malls, grocery stores and home improvement outlets. As merchants cut payrolls in response to declining business, that takes purchasing power out of the economy, reinforcing a downward spiral of retrenchment.

Professional and business services — which include lawyers, accountants, architects and management consultants — led the way down in May, shedding 39,000 jobs, according to the report. Construction declined by 34,000.

Manufacturing lost 26,000 jobs. Retail payrolls shrank by 27,000 and transportation and warehousing by 10,500. Finance and insurance lost 3,700 jobs, amid continuing worries that more red ink lies in wait for banks.

Sallie Mae, the giant provider of student loans, last month shut an office in Mount Laurel, N.J., eliminating jobs for 160 people, the company said. Among those joining the ranks of the unemployed was Brenda Davis, who earned $17 an hour there, and whose husband is disabled, making her the sole breadwinner.

Given that she worked in the collections department, Ms. Davis figures she carries skills that are always in demand, even in a shrinking market.

"As long as people are going to be in debt, there's going to be a need for collectors," she said.

But Ms. Davis's realm of potential jobs has effectively been shrunk by the price of gasoline. She commuted to New Jersey from her home in Philadelphia, a roughly 40-minute drive that took $60 a week in gas and tolls. As she looks for the next job, she must stay closer to home.

"With gasoline being $4 a gallon," she said, "I want to stay in the city."

The jobs picture has become particularly punishing for more vulnerable communities, with unemployment among African-Americans leaping to 9.7 percent in May from 8.6 percent in April . Over the same period, joblessness among those ages 16 to 19 climbed to 18.7 percent from 15.4 percent.

Health care remained a bright spot, adding 33,900 jobs in May, while restaurants and bars added 11,400 jobs.

Even those with jobs have been losing ground. Average hourly wages for rank-and-file American workers — roughly 80 percent of the American work force — nudged up to $17.94 in May, an increase of about 3.5 percent compared to a year earlier. But over the same period, rising food and gas prices contributed to inflation of roughly 4 percent, more than canceling out the buying power of the extra wages.

The White House and some economists questioned the validity of the spike in unemployment, noting a surge in people counted as entering the labor force. Some suggested the Labor Department might have botched the statistical adjustments it uses to cancel out seasonal fluctuations in employment, perhaps inflating the effect of graduating college students looking for their first jobs.

"I think this move is exaggerated," said Michael T. Darda, chief economist at the trading and research firm MKM Partners. New unemployment claims, while recently rising above 370,000 a week, are still not consistent with such a dramatic surge in joblessness, he said.

Others saw the report as catching up with other indicators that have spelled weakness, such as plunging consumer confidence.

The unemployment rate does not count people who have given up looking for work. Over all, the percentage of working age Americans employed dropped to 62.6 percent in May from 63 percent a year earlier.

In recent months, many companies have been cutting working hours for those on their payrolls, eschewing layoffs while hoping the economy improves.

"Companies didn't have so many people on their payrolls to shrink in the first place," said Ed McKelvey, an economist at Goldman Sachs, adding that American businesses have been hiring tepidly for years.

In May, those working part time because they could not find full-time work or because of slack business nudged up to 5.23 million, from 5.22 million. But that was a much smaller increase than in the previous month, a possible sign that businesses are running out of hours to cut: next, they may have to resort to layoffs on a larger scale.

"This is what happens when an economy grows solidly below trend for six months," said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington. "Employers cut back first on hours, then on jobs."

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