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Data on Job Losses, U.S. Factory Orders Paint Bleak Picture

By Michael A. Fletcher
Washington Post Staff Writer
Friday, October 3, 2008

U.S. factory orders sank by the largest amount in nearly two years in August and the number of workers filing new claims for unemployment benefits increased to a seven-year high last week, ominous signs that the economy is in sharp decline.

The bleak reports released by the government yesterday came after news earlier this week that manufacturing activity had tumbled to its lowest level since 2001 and consumer consumption had slowed sharply, heightening concern that the nation's economy was sliding toward recession.

Taken together, the data suggest the economy was struggling even before the financial crisis intensified last month.

"There has been a lot of bad news. There is no question that the U.S. economy is heading for a recession," said Nariman Behravesh, chief economist with Global Insight, a Massachusetts forecasting firm. "The only question is when did it start?"

The bad economic news has rattled investors on Wall Street, even as Congress considers a $700 billion bailout of the teetering U.S. financial system. With the Senate's approval of the package Wednesday night, the House is expected to vote on it today. But even if the legislation is approved, a recession would only be tempered, not averted, analysts said.

"The data we've seen recently suggests that the U.S. economy is entering a more dangerous phase and we are likely to see overall GDP contract," said Abiel Reinhart, an economist at J.P. Morgan Chase.

While the U.S. economy expanded through the first half of this year, growing by 2.8 percent in the second quarter, economists are predicting that it will contract in the last part of this year and the early part of next year. Some economists say it might not begin growing again until the middle of 2009.

"We're in for a rough ride," Behravesh said. "If the bailout does not occur, I think we're in deep trouble."

On Wednesday, industry research firm Autodata reported that sales of cars and light trucks in September had declined 27 percent compared with a year earlier. Speaking to reporters at the Paris auto show, Ford chief executive Alan Mulally said he believed the economic downturn would be "deeper and longer" than most people expected. He predicted the global auto market might not rebound until 2010.

The Commerce Department reported that orders for manufactured goods dipped 4 percent in August, the first decline after five consecutive monthly increases and the largest decline since October 2006. Analysts use the report to glean insight into how busy U.S. factories will be in coming months and into the demand for such goods as refrigerators, cars, cigarettes and clothing.

The report revealed weaknesses across the manufacturing sector. Aircraft orders were down 38.1 percent, and orders from iron and steel mills were down 16.7 percent from the previous month. Semiconductor orders were down 17.1 percent, and household appliances were off 6.9 percent.

The decline in factory orders started before the implosion on Wall Street, which caused borrowing costs for many firms to skyrocket, a development expected to further slow manufacturing activity. Also, with economies cooling in many parts of the world, demand for U.S. exports, which have been one of the strongest parts of the economy over the past year, is expected to weaken.

The economic slowdown will probably cause unemployment to spike. Last month, unemployment stood at 6.1 percent -- a five-year high -- but some analysts predict that it will reach 7 or 7.5 percent before the economy rebounds. And if the financial bailout package is defeated, the rate could go as high as 10 percent, Behravesh said.

A Labor Department report released yesterday said the number of laid-off workers filing new claims for unemployment benefits increased to 497,000 last week, the highest level since just after the Sept. 11, 2001, terrorist attacks. Labor Department analysts said that the lingering impact of hurricanes Gustav and Ike raised that figure by about 45,000. But even factoring in those special circumstances, economists said the number of unemployment claims was in line with an economy in recession.

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