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December job figures leave no doubt that the economy has slowed abruptly after gross domestic product (GDP) posted an impressive 4.9% advance in the third quarter -- the latest period for which growth numbers are available. Since then, the pace of expansion looks to have downshifted to around 1% or even a bit less than that. In other words, the U.S. is teetering on the edge of a recession. With oil hovering around $100 a barrel and the housing slump still playing out, that grim result can’t be ruled out.
Look for more interest rate cuts from the Federal Reserve in response to figures showing a paltry net gain of only 18,000 jobs in December and a spike in the unemployment rate to 5% -- a level it hasn't reached since November 2005.
We expect a quarter percentage point trimming of the benchmark federal funds rate when the central bank's Federal Open Market Committee (FOMC) next meets Jan. 29-30. The latest job numbers will spur talk in the financial markets of a half-point rate reduction, but we don't buy it because inflation concerns are coming to the fore. Fed officials will be reluctant to open the monetary floodgates when costly energy, food and other essential items threaten to push inflation higher.
The December job numbers put the net employment gain for 2007 at 1.33 million. This year, expect the total to ease to about 1.1 million as economic growth slows from last year's pace of about 2.2%. Note that the first estimate of fourth-quarter 2007 GDP growth is due Jan. 30, giving Fed officials something meaty to chew over during their next rate policy meeting.
A quarter-point cut in the benchmark fed funds rate would put it at 4%, compared with 5.25% last summer before the Fed shifted to an easing mode. Policymakers figure that rate reductions will lower borrowing costs for consumers and some businesses, enabling them to keep on spending. This should allow the economy to skirt recession, but much depends on how deep the housing decline goes before it finally stabilizes, and how high the price of oil might climb.
Though the December employment report was bearish, it wasn't entirely negative. Hiring in manufacturing and construction is clearly in retreat, with these sectors shedding 31,000 and 49,000 jobs, respectively. But services added 93,000 jobs, despite a decline of 24,000 in retail during a sluggish holiday sales period. Government added 31,000 jobs, implying that the private sector actually lost a net 13,000, the first drop in more than four years.
Job growth is critical because it generates income that results in sustained consumer spending, which accounts for about 70% of GDP. Officials at the Fed see "marked deceleration" in consumer spending brought about by higher gasoline prices and the prolonged, deep housing slump, according to the minutes of the FOMC meeting Dec. 11, when Fed officials lowered rates by a quarter point.
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