Unemployment sounds warning about US economy

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The unemployment rate surged to 5 per cent in December as the economy added a meager 18,000 jobs, the smallest monthly increase in four years, the Labour Department reported Friday.
Economists viewed the report as the most powerful indication to date that the United States could well be falling into a recessionary downturn. Evidence of widening unemployment heightened anticipation that the Federal Reserve would further cut interest rates this month, perhaps by an unusually large half a percentage point, in a bid to prevent the economy from sliding into the muck.
"This is unambiguously negative," said Mark Zandi, chief economist at Moody's Economy.com. "The economy is on the edge of recession, if we're not already engulfed in one."
A recession is typically defined as an extended period of at least several months during which economic activity shrinks and unemployment rises.
The swift deterioration in the job market resonated as a warning sign that troubles once confined to real estate and construction are spilling into the broader economy, threatening the ability of American consumers to keep spending with customary abandon.
On Wall Street, the report led to a big sell-off that sent the Dow Jones industrial average plunging nearly 2 per cent.
As the presidential race heated up, Democrats seized upon the bleak job numbers to indict Republican-led economic policies. "This morning's jobs report confirms what most Americans already knew," Nancy Pelosi, the House speaker, said in a statement. "President Bush's economic policies have failed our country's middle class."
President Bush cautioned that "we can't take economic growth for granted" and said he would work with Congress to be "more diligent" on protecting the economy. Speaking to reporters at the White House after a meeting with his economic advisers, Bush warned that "the worst thing the Congress could do is raise taxes on the American people."
The lone consolation for investors, workers and the public at large was that the bad news seemed severe enough to prod the Fed to push its benchmark rate below its current 4.25 per cent when policy makers meet at the end of the month. Lower interest rates decrease borrowing costs and encourage banks to lend more freely, spurring spending, hiring and investment.
The Fed has already eased rates three times since September in a bid to inject confidence into jittery markets. But analysts cautioned that central bankers may now feel constrained against further easing: inflation is growing, particularly as oil hovers near $100 a barrel. Lower interest rates, over time, can generate the seeds of inflation, and could make an already weak dollar worth less against foreign currencies.
"The Fed is trying to juggle a two-sided sword," said Ryan Larson, senior equity trader at Voyageur Asset Management. "They're trying to fight inflation moving higher and they're trying to fight a slowdown in growth."
In an effort to encourage lending, the Fed has been pumping cash through the banking system by auctioning off loans at discounted rates. On Friday, it said it would expand a pair of auctions scheduled for this month, offering $30 billion.
Some economists said the markets and other analysts were making too much of a lone jobs report that could yet be revised.
"The stock and bond markets are going into panic mode," said Michael Darda, chief economist at MKM Partners, a research and trading firm in Greenwich, Conn. "We're going to have a slowdown, but I don't think we're going to have a recession."
While filings for jobless benefits have been rising in recent weeks, the pace has not been swift enough to justify such a sharp jump in the unemployment rate, Darda added.
For months, the economy had managed to grow vigorously despite worrying developments, from the unravelling of the housing industry to turmoil in the credit markets. Through it all, economists marvelled at the resilience of the labor market, suggesting that as long as the economy kept creating jobs by the tens of thousands each month, Americans would keep spending and growth would carry on.
But the jobs report for December suggested that the negatives dogging the economy finally appear to be dragging it down.
"There's no mystery as to why the unemployment rate went up," said Robert A Barbera, chief economist at the research firm ITG. "The mystery is why it took so long." — New York Times