Poor unemployment report points to troubled US economy

In a troubling sign of a weakening economy, the Department of Labor reported on Friday that the US added just 69,000 jobs in May, about half of what Wall Street had been expecting. At the same time, the unemployment rate edged higher to 8.2 percent, up from 8.1 percent in April.

The low jobs total was the third consecutive month of disappointing jobs numbers. Initially, economists believed that companies had over-hired during the warm winter and had slowed hiring in the spring. Now, they say the economic downturn in Europe may be having an effect here, as banks become more skittish about making loans. At the same time, another barometer of confidence – the stock market – fell 6 percent in May.

“It is unambiguous the US economy is slowing down,” says Richard DeKaser, deputy chief economist at the Parthenon Group, a consulting group in Boston. “The US economy’s prospects depend on how the European crisis is resolved or left unresolved.”

If the economy is slowing, the implications are widespread.

The Federal Reserve, which meets in mid-June, may announce it will try to reduce longer-term interest rates even more. The stock market – which dropped sharply on Friday morning – may have to digest the implications of slower economic growth on corporate earnings. And President Obama will face even harsher criticism from rival Republicans over his handling of the economy.

Almost as soon as the Bureau of Labor Statistics, part of the Department of Labor, released the data, Republicans were firing off press releases. Mr. Obama’s expected opponent, Mitt Romney, called the May report “devastating economic news.” In a statement, House Speaker John Boehner said, “The American people are still asking, ‘Where are the jobs?’ ”

The White House scrambled to put a more positive spin on the numbers. Alan Krueger, chairman of the president's Council of Economic Advisers, noted that the problems in the job market “were long in the making and will not be solved overnight…. We are still fighting back from the worst economic crisis since the Great Depression.”

In a briefing for reporters, US Treasury official Jan Eberly cautioned against looking at one month of data. She said the economic recovery had to be looked at against the backdrop of the financial crisis.

“Households are still deleveraging,” or paying down debt, she noted. In addition, she observed that gasoline prices were still elevated in April and May, which may have held down some consumer spending.

Independent economists acknowledge being somewhat baffled by the May jobs report. For example, the report indicated that the construction trades lost 18,000 jobs in the month.

“Have the cities and states stopped all construction projects?” asked Joel Naroff of Naroff Economic Advisers in Holland, Pa.

Ms. Eberly suggested it was related to the strong construction hiring in December and January, when the weather was warmer than normal. “There was some payback,” she said.

Some economists say the problems in Europe are causing businesses to become more cautious, as some European authorities try to figure out how to keep their countries' banks solvent. The issue with Greece remains unresolved, and now there are reports that the Spanish banks are taking huge losses on their real estate loans.

“Europe is having an impact,” says John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C.

All the uncertainty causes business to pull back, agrees Joanie Ruge, chief employment analyst at Randstad, a large staffing organization.

“Business is being more cautious about hiring permanent staff,” she says. “Part of the problem is Europe, but there is also a lack of confidence in the US over whether economic conditions will be sustainable and what kind of policy changes may take place after the election.”

As business battens down the hatches, it is also starting to announce more layoffs.

Chicago-based outplacement company Challenger, Gray & Christmas on Thursday reported that announced job layoffs in May were 61,887, the most since last September, when they hit 115,730.

Although it’s not clear why layoffs increased by 38 percent over two months ago (the low point for the year), John Challenger, CEO of the firm, says some of the layoffs may be related to companies reassessing their prospects given the economy's slow growth.

“When the economy starts to go sideways, some of the companies that are a little more fragile start to look into the future to see what their demand will be in late 2012 or early 2013, and they can no longer hold the optimism they had earlier in the year,” he says.

However, he also wonders if companies are getting nervous about the deadlock in Congress over what to do with the Bush-era tax cuts, which expire at year’s end, as well as the forthcoming automatic spending cuts if there is no deal on the budget.

“There may also be some increased concern that the economy is propped up by extraordinary fiscal stimulus, and it may not have enough momentum on its own to weather the storm if some of that stimulus ends at the end of the year,” says Mr. Challenger.

Layoffs may happen immediately or be spaced over the course of several months, depending on the size of the cuts, says Challenger. “Generally, the larger the cuts, the more time a company takes to implement them.”

One of the largest of the announced layoffs in May came from computer pioneer Hewlett-Packard, which said it will reduce its 350,000-member workforce by 27,000. The downsizing will take place through layoffs and early retirements through 2014. At the same time, the company says it will limit its new hires.

“For those positions we have open, we’re giving top consideration to internal candidates,” said the company in an internal memo.

In the months ahead, there could be some other large layoffs, says Challenger.

For example, earlier this year, Hostess Brands, which makes Twinkies, Ding Dongs, Drake’s Cakes, and Wonder Bread, filed for bankruptcy and subsequently sent notices to all 18,500 workers that their jobs may be lost by plant closings, the liquidation of the company, or other restructuring moves. Hostess, based in Irving, Texas, is still in the process of negotiating with the International Brotherhood of Teamsters, which represents many of its workers.

However, Challenger says part of the company’s problem is shifting attitudes in the country.

“People don’t buy desserts like they used to,” says Challenger. “There has been a cultural shift away from sugar, especially old sugar.”