NEW YORK (Reuters) - Employers slashed payrolls by 524,000 in December, driving the unemployment rate to its highest level in almost 16 years, a government report showed on Friday, suggesting that the year-long recession was deepening.
KEY POINTS: * The Labor Department said the national unemployment rate rose to 7.2 percent in December, the highest level since January 1993. The jobless rate was 6.8 percent in November. * Analysts polled by Reuters predicted a reduction of 550,000 jobs in December. * November’s job losses were revised to show a cut of 584,000, previously reported as a 533,000 loss, while October’s losses were revised to 423,000 from a decline of 320,000. * With those revisions, the total reduction in U.S. nonfarm payrolls in the four months through December was 1.9 million.
“You got a short rally in the two-year Treasury note which is not unexpected given the jump in the unemployment rate.
The first quarter decline in GDP could be worse than the fourth quarter which is bullish for Treasuries, but could be quite averse for equity prices today and in the future. Now equities may take the attitude that they did last month that things can’t get any worse, but unfortunately the drop in average hours worked in this employment report suggests that the first quarter is going to be very, very weak.
“The implication for fiscal policy is that Obama, rather than low-balling the stimulus package at $750 billion, may ask for a larger package and settle on $800 billion. Reality has set in on the Obama plan. The Republicans felt it didn’t have enough tax cuts so he hinted at sizable corporate income tax cuts. But at the same time the Democrats are concerned that the tax cuts may not work quickly enough or may not work at all and they want shovel-ready public works projects and aid to state and local governments.”
“It tells us what we knew ahead of time: it’s a serious recession. The economic numbers are going to get worse before they get better. It fits in line with the notion of about a 6 percent hit to GDP. The data unfortunately does fit in line with the weakness that we’ve seen in other statistics.
“All of these (numbers) point to a very significant recession. Does the Fed recognize that? Yes. Is the Fed doing things to address that? Yes. Does our new administration that. Yes. Did our old administration fully recognize that? No.
“Does the market react to today’s numbers or does it react to what today’s numbers will mean for fiscal monetary stimulus and how conditions might change six to nine months from now. And that’s the going to be the tug of war today.
“But there’s no surprise in this data, unfortunately. It’s one where it was expected to show widespread weakness. And unfortunately it does.”
“These numbers are to be expected given the recession and the sharp contraction in consumer spending we have seen. We expect these kinds of job losses to continue in the first part of 2009 with between 500,0000 to 600,000 jobs lost in each of the first few months of 2009. We expect the unemployment rate to reach 8 percent by mid-2009. The recession was severe in the fourth quarter of 2008 and will be severe in the first quarter of 2009, but so far fiscal stimulus has been absent. The fiscal stimulus will probably come only starting in the second quarter of 2009 which is a very big delay. The economy requires a very large fiscal stimulus this year — at least in the $700 billion to $800 billion dollar range.”
WILLIAM SULLIVAN, CHIEF ECONOMIST AT JVB FINANCIAL GROUP IN
“You must measure the report against Street expectations: we had ADP data and whisper numbers of between 600,000 and 700,000 (job losses). The Street may be initially breathing a sigh of relief. That is why you may not get a cataclysmic market reaction to this report.
“But in reality it is a grim take on the U.S. economy as 2008 came to a close and if anything is pointing to continuing weakness in the job market in the opening months of 2009.
“This report helps explain why consumers have disengaged from economic transactions and points to this trend remaining intact at least for the first half of 2009.”
KEVIN LOGAN, SENIOR U.S. ECONOMIST, DRESDNER KLEINWORT, NEW
“They were pretty dismal.... In the last three months payrolls have declined by over 1.5 million jobs. That is an astonishingly big number and one that is rarely seen.
“The unemployment rate is rising about as fast as we’ve ever seen it rise.
“It is pretty much in line with the data on payrolls. They’ve revised back the losses in payrolls quite a lot for the previous two months.”
“It’s pretty ugly but more or less in line with expectations.
“What I’m somewhat struck by is the fact that the earnings numbers have yet to really adjust to all the slack that’s built in the labor market over the course of the past year. We’re at a point where we’re going to see those numbers really start to come down sharply in the coming months, especially as we’re in a new budget year for most companies and we’re coming off of a very weak earnings environment.
The initial focus was on the headline, the minus 524,000, which was in line with consensus expectations, but there was a net downward revision to the prior months of 150,000. In periods of weakness like this I think we can anticipate that this number will ultimately get revised lower as well.”
JAMES O’SULLIVAN, ECONOMIST, UBS SECURITIES, STAMFORD,
“It is a very weak report but people were bracing for it. The trend is consistently weakening. This December number could be revised weaker. The bottom line is that the labor market is weakening rapidly. We expect unemployment rate to rise to 8.3 percent by Q4.
“We still expect the mid-year number to be a turning point (for GDP). Right now the momentum is down and Q1 will be very weak including consumer spending. We are getting some relief from lower gasoline prices.”
RICHARD YAMARONE, CHIEF ECONOMIST, ARGUS RESEARCH, NEW YORK:
“The job situation is ugly and is going to get uglier. There’s no reason to expect hiring anytime in the next three to six months. We are not going to see any hiring until the government steps in and acts. Talk doesn’t work.
“The bigger shocker, if you look at the details, is that 806,000 jobs were lost in the household survey. That tends to smaller businesses, and that is a big problem (because) small business drives the U.S. economy. The rise in earnings, as minimum wages are rising, is another pressure on businesses.”
“No matter how you look it, those are dismal numbers. The payrolls headline was a tad better than the consensus forecast but we had a considerable jump in the unemployment rate now at 7.2 percent. The forex market seems to be without a lot of direction right now, with a big swing in euro/dollar since the numbers came out. I expect the pair to remain close to the 1.37 level for now.”
BRIAN DOLAN, CHIEF CURRENCY STRATEGIST, FOREX.COM, BEDMINSTER,
“I think the dollar has likely dodged a bullet for the time being. The data was not the disaster scenario many were expecting. However, there’s little cause for the dollar to strengthen much from here. The unemployment rate rising more than expected is likely the dominant negative to take away. We’re looking for minor dollar weakness out of this. There’s still nothing positive for the U.S. outlook in this data but you had to be under a rock for the last month not to have expected a bad jobs number. So it comes down to expectations, and the big risk is there are dollar shorts out there who might not be able to sustain those positions for the day.”
“They shoehorn in all these downward revisions. Some of the biggest downward revisions are in financial services which was collapsing. This is a very dismal report. This paints a much worse picture in 2008 than we had thought.
“We should see a significant downward reaction in the (stock) market. You cannot expect this to change anytime with this overwhelming downward trend.
“This doesn’t bode for first quarter unemployment. This is one of most significant downward quarters for jobs in post World War history.”
“Well, the numbers look better than I think many were anticipating. I had heard anywhere from 500,000 to about a million, so it’s definitely better than anticipated. It should be decent for the market. We were waiting for some kind of good news. This is bad, but it isn’t as bad as people were anticipating.”
MARKET REACTION: STOCKS: U.S. equity index futures turn higher after data. BONDS: U.S. Treasuries edge lower. DOLLAR: U.S. dollar pares gains against euro.