Recession Fears Reignited

By KELLY EVANS and KRIS MAHER
June 7, 2008

The likelihood that the U.S. is in a recession appeared to increase Friday, following weeks of hopes that the country might be skirting one.

Unemployment rose sharply and payrolls shrank for the fifth consecutive month. The economy news came on a day that oil surged to record prices, the dollar weakened and the Dow Jones Industrial Average plunged nearly 400 points. The deteriorating job numbers led markets to scale back the odds that the Federal Reserve will boost short-term interest rates this fall to ward off inflation.

The jobless rate posted its largest one-month gain in two decades, rising to 5.5% in May from 5.0% in April, the Labor Department reported Friday. Payrolls, measured by a separate survey, fell by 49,000 jobs last month, bringing the tally of job losses so far this year to 324,000. (Read more about the report.)

The rise in unemployment has been accompanied by higher food and energy prices, pushing up the "misery index" -- the sum of the unemployment and inflation rates -- to around 9.4, the highest level since the recession of the early 1990s apart from a one-month blip in 2005.

The unsavory prospect of rising unemployment and crude-oil prices -- plus recent signs that the housing market has yet to stabilize -- dashed lingering hopes that lower interest rates and fiscal stimulus were sufficient to help the U.S. economy right itself. "I've been convinced that the unemployment rate was headed toward 6%, but I didn't expect to get halfway there in one day," said Jay Mueller, economist and portfolio manager with Wells Fargo Advantage Funds.

Before the Labor Department's jobless report, futures markets had been putting the odds of a Fed rate increase in late October at about 80%. Afterwards, they reduced the odds to around 50%. Fed policymakers had been anticipating a slowing economy and a rising unemployment rate, hoping that those trends -- plus the possible end to the dollar's decline -- would help relieve inflationary pressures. The weakening dollar complicates the Fed's already delicate task of restraining inflation while shoring up growth, and contributed to the rise in oil prices.

The U.S. economy's weakness -- coupled with a strong signal this week from the European Central Bank that it is contemplating a rate increase -- undercut a rally in the dollar that had been fueled by supportive rhetoric from Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. The euro rose to $1.58 against the dollar, after falling to $1.54 following Mr. Bernanke's dollar-boosting comments earlier in the week.

In Washington, the Bush administration held out hope that measures already taken, including economic-stimulus checks the government has already issued, will help the economy's momentum, particularly in the second half. White House Counselor Ed Gillespie said it's still possible Mr. Bush will suggest new policy. But he acknowledged there's a "short window" because of congress's election-year calendar. "Don't rule it out," he said.

Democrats in Congress seized on the jobless data to support proposals they passed last month to extend unemployment benefits, which currently last up to 26 weeks, by 13 weeks for all workers and 26 weeks for those in the hardest-hit states. The House and Senate endorsed the proposal as part of an Iraq-spending bill, which Mr. Bush has threatened to veto, arguing that such spending is unnecessary at a time when the unemployment rate is still historically low.

Democrats were hoping Friday that the dismal jobs numbers would change the White House position. House leaders signaled plans to separate the two measures and move the benefits extension as soon as next week.

Sen. Barack Obama, the presumptive Democratic presidential nominee, called the labor report "deeply troubling" and blamed Republican economic policies. Republican nominee Sen. John McCain termed the data a "stark reminder of the economic challenges facing American families."

Economists cautioned the rise in the highly visible unemployment rate might overstate weaknesses in the labor market. Much of the increase was attributed to a leap in teenage unemployment to 18.7% last month from 15.4% in April. Philip Rones, deputy commissioner of the Bureau of Labor Statistics, cautioned that the survey of households from which the unemployment rate is calculated tends to be volatile between April and July due to an inflow of young people into the work force.

But the rise also underscores weakening prospects for employment this summer among those entering the work force. The jobless rate for workers aged 20 to 24 rose to 10.4% from 8.9% in April.

"To find someone that's actually hiring isn't so easy," says Kade Roybal, who graduated from the University of Texas at Austin last month with a degree in advertising and a 4.0 grade-point average, the highest possible there. Ms. Roybal, 21, is looking mostly around Dallas for an art-director position but says she would be willing to take an internship or move to another city.

In Chicago, Dantee Arias, 21, has applied to six advertising agencies in the past few months and had two interviews but no job offers. "I have a lot of friends in the same boat," said Mr. Arias, who is set to graduate from DePaul University later this month with a degree in marketing and a concentration in the Hispanic marketplace and has $60,000 in student loans. Some prospective employers want more experience or an M.B.A., he said.

The decline in nonfarm payrolls -- calculated from a separate survey of businesses -- was unwelcome, but well below the levels of job losses that usually mark recessions. Although job losses are spreading, the pain is concentrated in construction and manufacturing, which shed 34,000 and 26,000 jobs respectively in May and have been dropping steadily for over a year.

Service-sector employment, by contrast, gained 8,000 jobs last month. That reflects continued strength in education, health services and hospitality industries, offsetting losses in business and professional services and retail trade.

"The economy is very weak, perhaps even in recession, but it is not falling off a cliff," Bernard Baumohl, managing director of The Economic Outlook Group in Princeton, N.J., said in a note to clients.

Claims for unemployment insurance, reported each week by the Labor Department, have been rising but remain below the 400,000-per-week threshold crossed during prior recessions. That supports speculation by some economists that employers outside of the construction and finance industries have been avoiding layoffs because they've hired judiciously in recent years. The rise in unemployment reflects a reluctance to add new workers rather than layoffs.

Employment is the key driver of income and, thus, consumer spending, which accounts for more than two-thirds of U.S. economic output. A deteriorating labor market has been contributing to plummeting consumer confidence and a slowdown in spending.

Growth in consumer credit slowed sharply in April, the Federal Reserve said, raising additional worries that consumers are getting less credit to finance their spending. Revolving credit-card debt grew by just 0.4% at an annual rate in April from the previous month, following increases of 7.4% in March and 5.3% in February.

Friday's unemployment report showed increases in average hourly earnings are decelerating. While that's positive for Fed officials worried about inflation, it is pinching workers already hit by higher energy and food prices. Average hourly earnings rose $0.05, or 0.3%, to $17.94 last month, up 3.5% from a year earlier. Economists expect the government to report that consumer prices in May were about 4.0% above year-earlier levels.

Nearly one in five of those unemployed -- 18.3% in May -- have been out of work for 27 weeks or more, up from 16.5% a year ago, the Labor Department said.

Among them is Dean Ambrosini, 44, of San Diego. He was laid off last July from a $54,000-a-year job at BSM Financial LP, a mortgage-banking company in Allen, Texas, where he helped sell housing loans to investors. His unemployment-insurance benefits ran out in February. He says he can't afford to repair his 1996 Pontiac Grand Am, owes $3,500 in back rent and budgets $3 a day for dinner. "My cooking skills have improved," he says. "But I'm getting sick of chicken breasts, and walking around town to find them at the cheapest price."

Describing the job market as "a disaster," Mr. Ambrosini says: "I have a resume full of worthless skills and 10 years of experience basically down the drain." He says he has applied for more than 50 jobs without success, including at retailers like Home Depot and Lowe's, and fast-food restaurants. A Burger King near his home "actually had a 'No Hiring' sign," he adds.

--Sarah Lueck and John D. McKinnon contributed to this article.

Write to Kelly Evans at kelly.evans@wsj.com and Kris Maher at kris.maher@wsj.com