Pimco's El-Erian: Strong firms cutting jobs

NEW YORK (Reuters) - The precipitous drop in U.S. payrolls in February shows that profitable companies are bracing for the recession to deepen by shedding jobs, Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co., said Friday.

"The situation is getting worse, not better," El-Erian told Reuters Television on Friday. "Unemployment numbers are usually viewed as backward-looking. What today's number tells you is forward-looking. It tells you that even the profitable firms are shedding labor today in order to position themselves for a more difficult outcome."

The Newport Beach, California-based Pimco oversees more than $800 billion.

The U.S. unemployment rate hit a 25-year high of 8.1 percent in February as employers buckling under the strain of a recession axed 651,000 jobs, government data showed on Friday.

Adding to the gloom, a combined 161,000 more jobs were lost in January and December than previously believed. February's decline in non-farm payrolls was close to economists' forecast for a 648,000 drop.

"What you are seeing today in the U.S., you are going to see in the rest of the world in the next few months," El-Erian added.

Against this backdrop, investors should stay in high-quality investments, he said. "This is not the time to take enormous risk," El-Erian said. "This is the time to be under the government umbrella."

Pimco has been a buyer of high-quality debt such as "AAA"- rated bonds issued by banks and backed by the Federal Deposit Insurance Corp, as well as mortgage and agency securities.

El-Erian said Treasuries aren't on Pimco's "buy" list as the firm projects new issuance of about $2.5 trillion over the next 12 months.

"We've warned that Treasuries are getting to levels where investors would want to slowly migrate out, but migrate out to safety areas ... because issuance is going to be a problem," he said.

"Treasuries have benefited enormously from not only a flight to quality but also a flight to liquidity."

'STUNNING' RECESSION JOB LOSSES

El-Erian said the job losses in February, including the January and December revisions, are "stunning in terms of magnitude and composition."

"They point to a severe ongoing deterioration in the jobs picture that is accelerating and broadening," he said.

The United States has faced four consecutive months of 600,000-plus job losses a month, having transitioned from a multi-month period of payroll reductions in the monthly range of 100,000 to 200,000. El-Erian added the unemployment rate has surged from 4.8 percent a year ago to 8.1 percent.

"We are on our way to 9 percent by year end, if not beyond."

Overall, February's payroll figures contain important forward-looking insights, he said.

The damage is not limited to stressed institutions, El-Erian noted.

"Even the healthy and profitable ones are shedding labor as they recognize that the worst is yet to come. They are playing defense now in order to be able to play offense later on."

Furthermore, what the United States is experiencing will spread to the rest of the world in the next few months, he said.

"As such, the spike in the U.S. unemployment number is a forward-looking indicator of what we shall see in many other countries."

(Editing by Jan Paschal)