Job Cuts May Signal Slowdown, Not Recession


An unexpected drop in U.S. employment for August raises the chance of a recession, but the
decline may signal more of a short-term confidence crisis among employers than an imminent and severe economic downturn.

Unemployment Line

To be sure, the loss of 4,000 jobs for August reported on Friday -- the first drop in four years -- will weigh heavily in the Federal Reserve's decision on whether to lower benchmark interest rates, which Wall Street considers a certainty. A loss of confidence could lead to still more job cuts and slower spending. But a timely rate cut would likely repair the damage quickly, some economists say.

A closer look at Friday's employment numbers along with other recent data suggests that, for now, companies are nervously retrenching rather than bracing for an all-out recession, and the underlying economy has slowed, not stalled.

Stripping out volatile government hiring figures, the latest report shows that the private sector actually added jobs last month.

Data earlier in the week from the Federal Reserve's Beige Book and U.S. retailers also painted a much brighter picture of the economy. Even the downtrodden manufacturing sector expanded
in August, although at a slower pace than the previous month, according to the Institute for Supply Management.

"Take a Deep Breath"

"I think it is important we take a deep breath before screaming 'A recession is now around the corner!"' said Bernard Baumohl, executive director of the Economic Outlook Group in
Princeton, New Jersey.

"While the employment report was weaker than anyone expected, it is still a stretch to say the economy is now so impaired from the problems in housing and credit markets that a
recession is all but inevitable."

The Labor Department's August employment report shows a gain of 24,000 private sector jobs. Job growth for June and July was revised lower, suggesting that the job market had been
under pressure even before the latest bout of financial market unrest in August.

A drop in government payrolls more than erased the private sector gain, but economists pointed out that the biggest culprit was teachers, a segment that is vulnerable to large
seasonal swings and appears likely to be revised higher next month to reflect the start of the school year.

The data was collected in the week that included August 12, the height of the financial market turbulence, but before a rash of reported financial job cuts, which will likely show up
in employment reports for September or October.

Indeed, the report showed overall financial sector employment holding steady, though there were housing-related losses in the mortgage lending sector.

"Too Severe to Dismiss"

"There are some elements that look fluky, but the degree of weakness is too severe to dismiss," said Stephen Stanley, chief economist at RBS Greenwich Capital.

"We're not ready to concede that the labor market has weakened as much as these data would suggest, but there are still shoes to drop in the financial sector," he added.

U.S. stocks took a beating following the weak jobs report. The CBOE Volatility Index -- known as the "fear index" -- jumped more than 9 percent, though it remains well off the year high notched on Aug. 16, one day before the Fed lowered the discount rate it charges banks for direct loans.

Talk of recession has heated up lately, and leading economists including Martin Feldstein of the influential National Bureau of Economic Research have said that the housing market could plunge the country into a full-blown recession.

But a flurry of recent reports have given a much more upbeat assessment of the U.S. economy, suggesting it is trudging ahead even as it grapples with the housing dilemma.

The Fed's anecdotal Beige Book summary of economic conditions released earlier this week indicated that housing and credit problems have had little impact on the broader economy so far.

Weekly data on initial jobless claims have largely held steady, although the number of people on unemployment rolls has climbed to its highest level in more than six months, suggesting companies are not necessarily firing people en masse, but are increasingly reluctant to hire.

Retailer Results Strong

Retailers reported better-than-expected sales this week for the August back-to-school shopping period.

"The (August employment) numbers on the face of it are worse than most of the evidence we've been seeing," said Nigel Gault, chief U.S. economist at Global Insight in Lexington,
Massachusetts. "Which is telling the right story here? It could be that there's a lot more caution in hiring than we'd thought previously."

Comments from retailers supported that idea. While August sales reports looked healthy, many chain stores acknowledged they were worried about how consumers would withstand the
double blow of housing and credit.

A Goldman Sachs survey of the 48 retailers who gave presentations at the investment bank's conference this week found that 35 percent had a negative view of the consumer outlook, nearly double the 18 percent who gave pessimistic assessments a year ago.

If the jobs report is flagging waning confidence, then a lower interest rate should go a long way toward bolstering sentiment.

Still, Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said a rate cut does not address the underlying housing troubles as many homeowners find
themselves in houses they can no longer afford.

"What the rate cut does is buy investors a little time," he said.