September 5, 2003

Layoffs Rose Sharply Last Month, Report Says

mployers continued to shed workers in August, the Government reported this morning, but despite the drop in payroll employment the nation's unemployment rate ticked slightly lower last month.

In its monthly employment survey, which it said was probably not impacted by the August 14 blackout in the Northeast, the Labor Department said that non-farm payroll employment fell by 93,000 last month. It is the seventh consecutive decline in employment, and was the biggest monthly decline since March.

Meanwhile, the nation's unemployment rate dipped to 6.1 percent, from 6.2 percent in July.

The job loss numbers were a surprise and a disappointment to many private economists, who had been expecting that payroll employment would be unchanged or perhaps slightly higher. Compounding the concern is the fact that other indicators suggest the economy is growing vigorously in the current quarter.

The fact that rising demand is not prodding employers to add workers suggests that the economy may need to expand at a much more rapid rate than previously thought in order to generate job growth.

"This is a major disappointment," William V. Sullivan, a senior economist at Morgan Stanley, told viewers on CNBC shortly after the numbers were released.

"It confirms my thesis that there are structural shifts in the labor market that could impede new hiring."

Among other things, Mr. Sullivan cited surging productivity growth, big investments by businesses abroad and the spread of labor-saving technology as part of the shift that is allowing the economy to produce more with fewer workers.

"If productivity can grow at 3.5 percent to 4 percent indefinitely, and it is growing faster than that now, it will be very difficult to generate job growth," said David Resler, chief economist at Nomura Securities International.

"It may be a very long time before we begin reaping the rewards of an uptick in final demand in terms of rising payrolls."

If Mr. Resler's observation is borne out, it will present a major political problem for President Bush, who faces an election 15 months from now.

"The Democrats have an issue," said Joe Liro, an economist at Stone & McCarthy Research Associates, an economic consulting firm based in Princeton, N.J.

Mr. Bush, speaking to a friendly audience in Indianapolis this afternoon, reiterated his message that the economy is growing, in large measure because of the tax cuts he pushed through Congress. "I believe that when somebody has more money in their pocket, they will demand an additional good or a service," Mr. Bush said, "and when they demand an additional good or a service, in our society somebody will produce that good or a service. And when somebody produces that good or a service, it means somebody's likely to find work."

Earlier this week Mr. Bush announced that a post at the Commerce Department was being changed to focus on revitalizing the manufacturing sector.

Manufacturing payrolls fell again last month, according to the employment data. Factory owners, who have been cutting jobs for more than three years, shed an additional 44,000 positions last month.

Job cuts were also prevalent in the service and government sectors.

Service sector employment fell by 67,000. Government shed 26,000 workers.

Those declines were not offset by gains in health care, which added 25,000 workers, and in construction employment, which rose by 19,000.

Last month, the number of people in the workforce was largely unchanged, the Labor Department said, with just 10,000 giving up their job search.

The labor force comprises those working and those looking for work.

Last month nearly 2 million Americans had been unemployed for 27 weeks or more, representing nearly 22 percent of all jobless workers. Those numbers are similar to July's.

Stock prices, which were narrowly mixed in the initial aftermath of the report's release, moved lower as the trading session wore on. But the losses were minimal. Meanwhile, bond prices, which tend to strengthen on signs of weakness in the economy, rallied sharply, pushing interest rates lower.

At the close, the Dow Jones industrial average was down by 84.56, or 0.9 percent, at 9503.34. The Standard & Poor's 500 index shed 6.58, or 0.6 percent, and closed at 1021.39. And the Nasdaq composite index fell 10.78, or 0.6 percent, to 1858.24.

Prices of many longer-dated Treasury notes and bonds rose by a point or more. The benchmark 10-year notes were quoted in late trading at a price to yield 4.35 percent.

Many economists and participants in financial markets have been encouraged by recent economic data, which show that consumers have been spending at a rapid rate in the current quarter.

But a number of analysts said they were concerned by the income and hours worked data in this morning's report.

Average hourly earnings rose a miniscule 0.1 percent last month. And the average hourly workweek was unchanged at 33.6.

"The majority of economists are focusing on relentless spending data," said David Rosenberg, chief North American economist at Merrill Lynch.

"Personal spending is strong, there is no doubt about it," he added.

"But that is because of the mortgage refinancing boom and the tax cuts. Spending is strong, but production and incomes are weak. Once the steroids from home refinancing wave and the tax cuts wear off, the economy is likely to slow down."

Mr. Rosenberg estimates that on an annualized basis the economy received $300 billion worth of stimulus from the tax cuts and the extra money left in homeowners' pockets by lower mortgage rates.

Rising productivity is very good news for corporate profits, which are rising. Capital spending is improving, and eventually that may lead to increased hiring.

Mr. Liro, who is forecasting growth of anywhere from 3 percent to 5 percent over the next five or six quarters, said he expects hiring to increase in the fourth quarter. But the structural changes Mr. Sullivan described are real, he said, and will limit the rise in employment.

"There will be some job growth in the fourth quarter," Mr. Liro said, "but it won't be booming."