Job Losses Likely to Grow, Fueling Economic Gloom

Unemployment, which has been relatively benign during the economic downturn, is expected to become a bigger problem as the summer progresses.

More and more companies, faced with rising energy costs and moribund consumer spending, are announcing plans to trim costs by cutting labor. The financial sector has been among those hardest hit, primarily because of the credit crunch. But the job losses are beginning to expand.

"It's interesting to see how it kind of spread along the economy," Tom Higgins, chief economist at Los Angeles-based Payden & Rygel. "It started in housing, spread to consumer goods, now it's in financials and government will see it as tax revenues go down."

A rise in unemployment means less consumer spending and, consequently, lower growth for retailers and other key components of the economy. That also translates into corporate weakness and hurts the stock market.

As such, next week's report on June unemployment--particularly in troubled economic times like these--takes on added significance.

"People are watching this pretty closely," says Higgins. "What we're looking for at this point is how resilient the consumer is going to be, so anything relevant to the consumer is going to be important."

Higgins believes the US economy is in recession and that employment weakness has been a key factor. Though the big financial firms have been the primary weak spot, he expects the damage to spread to retail and ultimately the public sector, where falling home values will push down tax revenues and force the government to lay off workers.

Readjusting to Different World

The trend will all add up to more fear from both consumers and investors.

"We're readjusting to a different world so to speak," says James L. Butkiewicz, an economist at the University of Delaware. "The prosperity, the good times that we've enjoyed for the last several decades, the unbridled optimism and the continued going up, that everything's going to be great, people are rethinking that a little."

That's happening even though economic indicators are nowhere near the depths of previous slumps. In the 1982 economic slump, for instance, the jobless rate soared to 9.7 percent, nearly twice what it is now.

"I understand why people are upset," Butkiewicz adds. "Unemployment isn't terrible, but things aren't as good as they were a couple years ago so it's making people stop and think."

Stocks plunged last month after the government announced the biggest spike in unemployment in 21 years to 5.5 percent from 5 percent. No one is expecting a repeat performance when the government releases June data on July 3, but there's also little hope for much improvement and the sentiment as the year progresses is for the unemployment rate to continue to climb.

"Right now I'm not terribly optimistic. My sense is we're going to go a little higher," Butkiewicz says of the June unemployment figure. "All the evidence that's coming in indicates the economy continues to slow. You keep reading about layoffs here, there and everywhere, and I think we're going to see another bump up."

Large financial institutions and brokerage banks have led the push up in unemployment. Citigroup is the latest to announce massive layoffs, saying it would cut about 6,500 employees, or 10 percent, from its investment bank division.

Payden & Rygel actually is calling for a slight move downward from last month's figure, primarily on the belief that because the number shot up so noticeably in May a follow-up is unlikely. But Higgins says the number will rise after that and probably eclipse 6 percent in a few months.

Holiday Could Limit Fireworks

Whether the continued weakness in unemployment substantially affects the stock market will depend on a number of factors.

Higgins will be watching what the Federal Reserve's Open Market Committee says following its meeting this week. Should the Fed provide any indication of interest rate hikes, the unemployment picture becomes more important, he says.

Another factor: The Fourth of July.

Economic analyst Rick Pendergraft points out that the employment numbers will come out the day before July 3 on a holiday-shortened trading day when the markets will close at 1 pm. A number worse than expected might not have full market effect until Monday, he says.

"Traditionally we see on a holiday weekend, the volume just dries up after lunch," says Pendergraft,  who edits the Investors Daily Edge online industry newsletter. "There's not going to be time for a full reaction there."

Matthew Tuttle, president of Tuttle Wealth Management, says the jobless numbers, though not disastrous, add to the sour mood of investors.

"Mixed in with everything else that's going on--higher oil prices, inflation, the slowing economy, housing--add in unemployment and you have a recipe for a market that's not going to be very strong," he says.

Most advisers, though, are advising their clients to stay diversified and not get rattled by the vagaries of business news.

"People are just so used to getting higher returns. I often wonder what people will do when things really hit the fan. I don't think we've hit that," says Julie Murphy Casserly, president of JMC Wealth Management in Chicago. "We've got this up and down and up and down like there's a secular bear market going on. I really just try to harness my clients to act regardless of what's going on in the everyday world."

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