Job losses' ramifications far-reaching

Some expect Fed to cut rates by three-quarters of a point.

The job market, one of the strongest pillars of the US economy, is starting to deteriorate.

Employers in almost all sectors are postponing or canceling plans to hire new workers. If the hiring downturn continues, the ramifications for the economy could be major:

•Many analysts say a paucity of jobs will push America's economy into a recession, if it isn't there already.

•Consumer confidence – running at a low point – could continue to fall as Americans become discouraged about their job prospects.

•The Federal Reserve, which meets March 18 to decide interest-rate policy, will be under pressure for significant rate cuts – perhaps as much as another three-quarters of a percentage point.

"This could be a big turning point in the economy," says Mark Vitner, senior economist at Wachovia Securities in Charlotte, N.C. "It's clear that we are losing momentum, and weakness in the economy is broadening."

The latest indication of weakness in the job market came Friday, when the Labor Department reported that the economy shed 63,000 jobs last month. This follows a loss of 22,000 jobs in January. Although the actual unemployment rate went from 4.9 percent to 4.8 percent, economists say a more telling number is some 644,000 individuals who in January gave up looking for work and dropped out of the labor force altogether.

"The increase in disappointed workers, the most since 2003, is consistent with across-the-board reluctance to hire," says Andrew Stettner, an analyst at the National Employment Law Project in New York.

Problems in the job market come against a backdrop of yet more turmoil in the credit markets. Banks are asking hedge funds to meet margin calls as the hedge funds' financial assets fall in value.

In addition, the stock and bond markets reacted badly to an announcement last week by Ambac Financial Group, an insurer of financial assets, that it would try to raise $1.5 billion by issuing new stock. Ambac is trying to maintain its AAA credit rating.

On Friday morning, in an attempt to shore up the credit markets, the Fed announced that it would expand a special funding facility for banks. This would make it easier for them to borrow money.

"The whole point of the funding is they need to get some normalcy to return to the banking system," says Bob Brusca, an economist with Fact & Opinion Economics in New York.

Many in the credit markets are convinced that the Fed will drop interest rates sharply when it meets March 18.

"I expect a half-a-point drop, but the bond market is already pricing in a three-quarter-of-a-point drop," says Richard DeKaser, Washington-based chief economist at National City Corp., a Cleveland bank. "There is even a small possibility of a full percentage-point drop."

Even the prospect of a significant decline in interest rates has done little to help Wall Street. For the week, the Dow Jones Industrial Average fell 372.70 points to 11893.69. The Dow is down more than 1150 points for the year.

Despite the prospect of declining demand for petroleum products in the United States as the economy slows, the price of oil has continued to march higher. On Friday, it closed at $105.15 a barrel.

"There is no question high energy prices are an additional drag on the economy," says Mr. Vitner.

A close look at labor numbers seems to indicate that the downturn in hiring is hitting younger Americans the hardest. Over the past year, workers between the ages of 35 and 44 have seen their employment drop 2.1 percent, according to the Center for Economic and Policy Research (CEPR) in Washington. Even younger workers fared worse, as those between ages 20 and 24 saw their employment drop 3.5 percent. Teenage employment fell 6.2 percent.

"Layoffs are usually based on reverse seniority, so maybe someone who has held a job for 10 to 15 years holds on to their job when younger workers don't," says Dean Baker, codirector of CEPR.

Last month, layoffs spread beyond the housing sector and financial institutions. The durable-goods business lost 40,000 jobs. In the auto industry, 12,900 jobs disappeared. In the past year, employment in that industry shrank by some 75,500 jobs.

Short-term prospects for the auto industry are not good, since a strike is under way at Detroit-based American Axle & Manufacturing, Vitner says. The strike, which started on Feb. 26, is affecting 20 plants. Last Thursday, for example, General Motors said it would reduce work at eight facilities.

"The strike is putting more pressure on the auto companies," Vitner says.

Jobs in the retail sector are also being eliminated. Last month, 34,100 jobs were shed. The losses have been particularly noticeable for clothing stores, which have reduced employment by 29,500 jobs since October.

The drop in retail jobs may reflect a drop in consumer spending, after adjusting for inflation.

"With energy prices high, there has been a real drain on discretionary income," Mr. DeKaser says.

The loss of jobs won't alleviate problems in the housing sector. Until recently, a strong labor market was a main factor driving up incomes. Now, a rising tide of layoffs could exacerbate mortgage problems, DeKaser worries. "The labor market was the last bulwark on foreclosures," he says. "Increasingly, those on the margin will find the lack of jobs makes it all the more difficult to keep up with their house payments."