Job Losses Will Bring Rate Cut

The weakening job market, which translates into slower income growth and less spending, will continue to choke oxygen from the economy.

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

April 4, 2008

The loss of 80,000 jobs in March signals another interest rate cut by the Federal Reserve later this month. The third straight monthly drop in jobs plus an unemployment rate now at its highest level in two and a half years provide more evidence that the economy is likely in recession, putting more pressure on the Fed to act.

As economic growth revives during the second half of this year, as we expect, businesses will begin hiring again. It's not inconceivable for the year to wind up with a slight increase of 100,000. That compares with employment growth of 1.13 million in 2007.

Job losses over the past three months total 232,000, according to the Department of Labor. The last string of job losses occurred from February through June of 2003.

The unemployment rate moved to 5.1% from 4.8% last month. It last stood at 5.1% in September 2005. We look for the rate to rise to 5.5% by year-end.

Hardest hit sectors continue to be construction, manufacturing and temporary-help services. Weakness also showed up in retailing. There was some growth in health care, restaurants and mining.

Fewer jobs are sure to make consumers tighten up on spending, further hurting the economy, which relies on consumer spending for 70% of output. As Fed Chairman Ben Bernanke told Congress this week, "Concerns about employment and income prospects together with declining home values and tighter credit conditions have caused consumer spending to decelerate considerably from the solid place seen during the first three quarters of last year."

The tax rebate checks that Treasury will begin to send in May will help. We expect consumer spending to rise only 2% this year after a 2.9% increase in 2007. Overall, gross domestic product will probably expand about 1% this year, compared with 2.2% last year.

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