Friday’s dismal employment report suggests the U.S. economy is in growing danger of tipping back into recession, with the outcome of a likely war in Iraq a possibly decisive factor. Although the unemployment rate rose only slightly to 5.8 percent from 5.7 percent, the Labor Department reported that the economy lost 308,000 jobs in February, far worse than even the most pessimistic forecasts.
The job-loss figure was inflated by a call-up of thousands of military reservists, harsh winter weather and other unusual factors, but at least half the reported job losses were “very real,” estimated Rich Yamarone, director of economic research at Argus Research Corp. That is a troubling sign for an economy that presumably has been in expansion mode for more than a year and should be adding 150,000 jobs a month, not losing them.
The latest wave of job losses makes it increasingly inaccurate to call this a “jobless recovery” along the lines of 1991-92, when the labor force at least held steady during the sluggish early phase of what turned out to be a record 10-year expansion.
Judging from five straight quarters of growing U.S. output, most economists have concluded the recession ended by January 2002, yet over the past 13 months the economy has lost 324,000 jobs. By the same point in the previous expansion the economy was beginning to add jobs at a steady clip.
ECONOMY AT A ‘TIPPING POINT’
“This recovery has become awfully precarious, and today’s unemployment report underscores how precarious it has become,” said Anirvan Banerji, research director at the Economic Cycle Research Institute. He said the economy is at a “tipping point” comparable to where it was in September 2000, when his firm began warning of the danger of recession.
“We are in this window of vulnerability where we could easily be tipped into recession by some kind of shock,” he said. It is easy enough to imagine what kind of shocks might be awaiting us in the next several weeks or months, ranging from a military setback to a terrorist attack.
“Problem No. 1 is oil prices,” Banerji said. If crude prices would remain above $40 a barrel for just one or two months it could be enough to push the economy back into recession, he said. But he stressed that a positive outcome in Iraq or some other good news — such as the capture of Osama bin Laden — along with declining oil prices still could be enough to put the economy back on a solid growth path.
(Economists with the National Bureau of Economic Research have not officially declared an ending date for the recession that began in March 2001.)
“We are more vulnerable to the recession danger than we were before, but we are not locked into a recession track yet,” Banerji said. “The economy could be whole lot stronger six months from now.”
WILL THE FED ACT?
And indeed, many economists believe that continuing slow to moderate growth is still the most likely case for this year.
“Productivity growth has remained fairly strong,” said Jim O’Sullivan, an economist with UBS Warburg. “So unless employment continues to plunge, output should rise at least modestly.”
But he and other economists said Friday’s employment report makes it more likely the Federal Reserve will shift its “balance of risks” statement March 18 to reflect growing signs of economic weakness, opening the door for a possible move to lower short-term interest rates again from their current, historically low levels.
“It just would not appear correct to say that the risks are still balanced between inflation and growth,” said Bob Gay, global strategist for Commerzbank Securities. “The numbers just have not supported that.”
He projects economic growth of just 1.5 percent for this year, putting the economy “literally on the knife’s edge between recession and growth.”
Sung Won Sohn, chief economist at Wells Fargo, said the slight increase in February’s jobless rate gives a more accurate picture of the labor market than the sharp decline in payroll jobs.
“I think the economy is treading water,” he said. “There is no question about it — it is soft. But we’re not going back into recession — at least not yet.”
Patrick Fearon, an economist with A.G. Edwards, points out that economic indicators for January were relatively strong. Factory orders were up 2.1 percent that month, the best showing since July, auto sales were stronger than expected and the economy added 185,000 jobs, its best performance in more than two years.
But early reports from February have been discouraging, at least in part because consumers have been “paralyzed” by war fears, he said. The latest report on manufacturing from the Institute of Supply Management, on Monday, showed a larger decline than expected, with the index falling to 50.5, indicating minimal growth for the sector. The ISM non-manufacturing index also fell slightly for February.
One of the few bright spots in Friday’s employment report was an increase in overtime hours in the manufacturing sector, an indication that factories are choosing to generate more productivity out of existing workers rather than expanding payrolls.