Job losses a strong portent for rate cut
The Labor Department's Friday report that the economy shed 4,000 jobs in August - the first monthly drop in four years - shocked financial markets and analysts who had expected employment gains of around 100,000. The unemployment rate remained at 4.6 percent, but only because a large number of people dropped out of the labor market.
The report, variously described as "ugly" and "dismal" raised fears that the plunging housing sector and worldwide turbulence in financial markets could push the economy toward recession.
"I'm not really ready to use the 'R' word yet, but it's certainly something that's in the back of my mind, and would certainly be something in the front of the minds of people over at the Fed," says Mike Schenk, Credit Union National Association senior economist.
Economists now widely expect the Fed to cut a key interest rate by at least a quarter of a point, and possibly more, when it meets Sept. 18. The central bank has held the federal funds rate, which banks charge each other for overnight loans, at 5.25 percent for more than a year in an effort to tame inflation.
The federal funds rate is used by lenders in setting interest rates for many consumer and business loans.
Fed Chairman Ben Bernanke said late last month that the central bank's job is not to rescue well-heeled investors who made risky bets on the housing market and other financial products.
But he made it clear that the Fed will respond if financial market turbulence affects the broader economy.
"The stigma of a 'bail out' of Wall Street risk takers has been trumped by the growing downside risks to the economy," Stuart Hoffman, chief economist at PNC Financial Services, said in an advisory to clients.
While Hoffman predicted a quarter-point rate cut, other economists said the Fed should do more.
"One (employment) number is not a trend but this will scare the Fed," said Ian Shepherdson of High Frequency Economics, adding that the outlook for further job losses ahead meant the Fed should cut rates by a half-point.
In recent weeks, as rising defaults among borrowers holding subprime mortgages - higher-priced products to consumers with poor credit - have exploded into a more generalized credit crunch, the central bank has taken a number of actions.
The Fed has pumped money into the financial system to aid credit markets and cut the rate at which banks borrow directly from its discount window.
Market confidence has yet to return, however.
Atlanta Fed President Dennis Lockhart in a speech last week noted business financing is backed up in credit markets. He said falling home prices, diminishing credit availability and higher interest rates could spark a slowdown in home-equity borrowing, used for consumption.
Lower household wealth could also reduce spending, he said. Consumer spending is about two-thirds of the economy.
The economy grew at a nearly 4 percent pace in the second quarter, but Bernanke has cautioned that backward-looking numbers will be of little help as the Fed debates policy in a fast-moving environment.
Some other more recent anecdotal information, including the Fed's own beige book report on conditions in the 12 Fed bank districts, had indicated that business and consumer activity held up relatively well in recent weeks.
Even the jobs report showed continued wage gains and hiring in the broad services sector.
But Schenk and others cautioned that problems in the credit markets will not be reflected until later.
The August decline in employment centered in the goods-producing sector of the economy.
The construction industry lost 22,000 jobs during the month, while factory payrolls plunged by 46,000.
Manufacturing employment has fallen by 215,000 in the past year. Factory job declines in August went beyond housing, including auto plants and semiconductors, as well as wood products and furniture.
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