On Friday, June 6 2008, a striking piece of news came sharply on the market. The U.S. employers shed jobs for a fifth straight month in a row. The May unemployment rate jumped to its highest in more than 3-1/2 years, partly because more people were trying to come back into the workforce, a Labor Department report released Friday showed.
The unemployment rate rose to 5.5 percent last month from 5 percent, its highest level since October 2004. Some 49,000 jobs were cut from payrolls in May, up from a revised 28,000 that were lost in April. Wall Street economists surveyed by Reuters forecast that 58,000 jobs would be lost in May but had foreseen the unemployment rate rising only to 5.1 percent. So far in 2008, job losses have totaled 324,000, the department said. The number of people in the workforce climbed by 577,000 in May, up sharply from an increase of 173,000 in April. Department officials noted that in the period from April through July, there typically is an increase in the numbers of young people seeking temporary work when school is out. There were substantial job losses in May in construction industries where 34,000 cuts were made, in manufacturing where 26,000 jobs were lost, and among providers of professional services where 39,000 jobs were lost.
The data shows, according to most of the economists surveyed, that US is already in a “mild recession”. Some analysts expect further dramatic unemployment data in the incoming months, which would deepen the recession in the US, the largest economy in the world.
TOM SOWANICK, CHIEF INVESTMENT OFFICER, CLEARBROOK
FINANCIAL LLC, PRINCETON, NEW JERSEY:
“Jobs data was horrible but also inflationary with hourly earnings rising much more than expected. The dollar has become toast versus the euro, as the European Central Bank focuses on inflation and the Federal Reserve seems willing to risk a run on the dollar and inflation because of uncertainty with respect to financial markets and uncertainty with respect to the direction of the economy.”
MICHAEL MORAN, CHIEF ECONOMIST, DAIWA SECURITIES AMERICA,
“It was not a half-bad report except for the unemployment rate which clearly makes it a soft report. Most of the increase in unemployment was from workers entering the labor force and a lot of those workers were young workers, probably people getting out of school and not finding jobs right away. But that’s still an indication of a soft economy.
What are the consequences of this announcement for your investing strategy?
First of all, many companies will take drastic measures in reducing their workforce, in order to prepare themselves for the incoming recession. They do so because they foresee a decrease in their sales and therefore need to lower their fixed costs to avoid losses. Because the highest fixed costs which can be easily cut, especially in the US permissive labor legislation, are the salary ones, many companies have already started to trim jobs. General Motors Corp. has said 19,000 workers, or about 26 percent of its union workforce, accepted the latest offer to leave, and most of those will stop working by July 1. Ford Motor Co. will trim salaried-employee costs by 15 percent by eliminating contract workers and not filling open jobs.
The protracted housing slump and resulting collapse in subprime lending were also reflected in today’s report. Payrolls at builders fell 34,000 after decreasing 52,000. Financial firms decreased payrolls by 1,000, after a gain of 1,000 the prior month.
A loss of jobs is one of the criteria used by the National Bureau of Economic Research to determine when recessions begin and end. The group, the official arbiter in the U.S., defines contractions as a “significant” decrease in activity over a sustained period of time. In addition to payrolls, changes in sales, incomes, production and gross domestic product are also considered. This means that in the incoming months the US companies share prices will start to go down, since the share owners will sell some of their assets in order to offset losses in value they suffer or in order to sustain other income decreases, which is good news for those willing to buy (remember, it is always the best to invest in a bear market, and a recession in the US looks like a big bear!).