By Neil Irwin and Tomoeh Murakami Tse
Washington Post Staff Writers
Saturday, September 8, 2007
Job creation in the United States came to a standstill in August as the downturn in the housing market led employers to sharply reduce hiring, a government report said yesterday.
It was the strongest evidence yet that problems in the housing market were seeping into the broader economy. The stock market fell sharply, and the report made it highly likely, analysts said, that the Federal Reserve would cut a key interest rate later this month to try to minimize the fallout.
The Labor Department said yesterday that the nation lost 4,000 jobs in August, the first time employment had shrunk since August 2003. Economists had predicted a gain of about 125,000 jobs. The report also revised previous months' job growth to reflect a decline and indicated that the unemployment rate held steady at 4.6 percent.
"We did not expect a report as awful as this," said Ian Shepherdson, chief U.S. economist at the consulting firm High Frequency Economics. Many analysts said that the odds of a recession resulting from the recent turmoil in the housing and credit markets have risen.
Some of the sharpest declines in employment were in areas directly affected by the housing sector. Construction employment fell by 22,000 jobs, and the manufacturing sector, which includes makers of the raw materials for houses, lost 46,000 jobs.
With a glut of homes on the market this year across most of the country, builders have curtailed new construction, accounting for the 96,000 jobs lost in the sector since September 2006. And with fewer homes changing hands, there is less work for real estate agents and mortgage brokers. The number of jobs in credit intermediation, which includes mortgage brokers, fell by 6,000 in August.
"We're definitely operating in a more cautious mode," said Steve Gerber, vice president of production for the home builder Bogdan Builders of Bethesda, which has not hired anyone in a year. "When you're going through times of market changes, you don't want to build up."
There is reason to think the damage to housing-related employment will continue. The Labor Department survey was based on a snapshot of employment conditions for the second week of August, which was before the credit market's turbulence had time to ripple through the employment sector.
Since then, mortgage and other housing-related companies have announced tens of thousands of job cuts. Countrywide Financial, the nation's largest residential mortgage company, said yesterday that it would cut its staff by up to 12,000, and IndyMac Bancorp, one of the largest mortgage issuers, said it would lay off 1,000 people.
The weak employment situation in August appeared not to reflect widespread layoffs. While the number of claims for unemployment insurance has been steady, many companies have held off on hiring. And that makes economists and investors alike worry that the U.S. economy will slow in the months ahead.
"People have been saying for some time, 'The consumer will be affected by housing, but as long as job growth continues, the consumer will be okay,' " said Nigel Gault, an economist at the research firm Global Insight. "Well, now here we are at minus 4,000 jobs."
Investors have worried that a soft labor market would ultimately hurt corporate earnings. "When you see a number like that, you start thinking about the consumer, you start thinking about selling restaurants, selling retailers, selling anything that has to do with consumer discretionary" spending, said Bart Barnett, head of equity trading at Morgan Keegan.
That increased pessimism was apparent on Wall Street yesterday. The Dow Jones industrial average fell 249.97, or 1.9 percent, to 13,113.38. The technology-heavy Nasdaq fell 48.62, or 1.9 percent, to 2565.70 The broad-based Standard & Poor's 500-stock index fell 25, or 1.7 percent, to 1453.55. The Federal Reserve has been watching for signs that problems in the housing sector and credit markets would affect the broader economy. The president and chief executive of its Atlanta bank, Dennis P. Lockhart, confirmed that stance in a speech Thursday. "So far, I have not seen hard or soft data that provide conclusive signs that housing problems are spilling over into the broad economy," he said.
Fed analysts interpreted the employment data as such a sign, and now think it is likely that the Fed's policymaking committee will cut its benchmark federal funds rate of 5.25 percent by at least a quarter point when it meets Sept. 18. Doing so would lower costs of borrowing to consumers and businesses, stimulating the economy.
"Now we're going to get a cut," Gault said. "The question is how much."
The Bush administration stressed that there were positives in the jobs report. The 4.6 percent unemployment rate is stable at what is, by historical standards, a low level. And wages for non-supervisory workers rose 3.9 percent over the 12 months ended in August.
"It's not the kind of number I'd like to see," Treasury Secretary Henry M. Paulson Jr. told Bloomberg Television. "Data does not always move in a straight line, so occasionally you will find some surprises. The economy will continue to grow in the second half of the year."
Congressional critics were less sanguine.
"Too little has been done to quiet the market's justifiable fears that things are headed downhill," said Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee, who called the report a "punch to the gut of our economy."
Tse reported from New York. Staff writer Howard Schneider contributed to this report.