Employers to Shed More Jobs

Credit woes and large job losses spell a coming interest rate cut, but the economy will keep stumbling.

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

October 3, 2008

The biggest drop in jobs in five years last month and a strong possibility of more sizable losses to come will likely spur the Federal Reserve to cut short-term interest rates before Election Day. But the bid to boost lending in response to the credit crunch, sliding employment and other dismal economic indicators won’t ward off the looming recession.

September’s net job loss of 159,000 following a decline of 73,000 in August reflects serious hunkering down by employers in light of the financial mess on Wall Street, which spawned the lending freeze rippling through the weak economy.

Job losses are broad based, with manufacturing and construction continuing to lead the pack. The sharp drop in housing starts reported two weeks ago and a monthly survey of purchasing managers in manufacturing released Oct. 1 indicate that employers will continue to shed jobs in coming months. Health care, government and mining are the only sectors adding jobs. September’s decline brings jobs losses for the year to 760,000. Last year, jobs increased by 1.1 million.

Some of the September job losses are attributable to the impact of Hurricane Gustav, Hurricane Ike and the fallout on suppliers of the strike at Boeing. But only some. Clearly, the staggering economy is the chief reason.

Businesses have been able to avoid big cuts despite a weak economy by relying on temporary workers and reducing some full-time workers to part-time status. But those moves will give way to further layoffs as the economy stumbles into next year.

As the virtual freeze in bank-to-bank lending and in the commercial paper market results in more firms being squeezed, employers will keep looking to reduce their biggest cost -- labor -- until the credit storm passes. We expect it to dissipate within weeks of Congress passing the $700-billion-plus rescue package, but the economic downturn is sure to continue into next year.

The Labor Department also reported that the unemployment rate stayed the same as the previous month at 6.1%. We expect the rate to increase through 2009, reaching about 7%.

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