Jobless rate hits 5 percent, 2-year high

Saturday, January 5, 2008
In this Nov. 30, 2007, file photo, a construction worker helps builds a condo project in Mountain View, Calif. Construction spending edged up slightly in November as a continued steep slump in housing was offset by record spending on government and business projects. (AP Photo/Paul Sakuma, File)

WASHINGTON (AP) -- Sluggish hiring in December drove unemployment up to a two-year high of 5 percent, and the Federal Reserve announced a new move to ease the credit crunch.

Employers last month added the fewest new jobs to their payrolls in more than four years, according to the employment report released Friday by the Labor Department. The report fanned fears of a recession, showing that the job market is deteriorating under the strain of a housing slump and the credit crunch.

"The economy is getting hit by some body blows. The big question is whether the economy can withstand it or will it take a fall," said Ken Mayland, president of ClearView Economics.

The unemployment rate jumped from 4.7 percent in November to 5 percent in December, the highest since November 2005 after the Gulf Coast hurricanes dealt the country a mighty blow. Total payrolls - both private employers and government - grew by just 18,000 last month, the worst showing since August 2003, when the economy suffered job losses as it struggled to recover from the 2001 recession.

On Wall Street, the stocks tumbled. The Dow Jones industrials were down more than 140 points in morning trading.

With the odds of a recession increasing, President Bush is exploring a package to stimulate the economy. The president, who has been coping with low marks for his handling of the economy, isn't expected to make any decisions until later this month; He delivers his State of the Union address to the country on Jan. 28.

As part of its recently launched effort to make credit more readily available, the Fed announced that it will provide banks an additional $60 billion worth of loans through two auctions on Jan. 14 and Jan. 28. The Fed's first two auctions offered banks a total of $40 billion in loans.

The White House stressed Friday that it is on top of the situation. "You have to be persistent in looking at what the threats are to economic growth and stay after them," said deputy press secretary Tony Fratto.

The December employment picture was much weaker than economists were expecting. They were forecasting the unemployment rate to bump up to 4.8 percent and for employers to add around 70,000 jobs to their payrolls.

Employers have grown cautious as they try to cope with fallout from housing and credit problems and rising uncertainty about how the economy will fare in the months ahead. Galloping energy prices and bad weather in some parts of the country also probably figured into the weak job figures.

Manufacturers, construction companies, financial services all cut jobs in December - casualties of the housing slump. Retailers also sliced jobs.

The government added 31,000 jobs in December, while private employers actually cut payrolls by 13,000, underscoring the weakness.

For all of 2007, the economy added 1.33 million jobs and the unemployment rate averaged 4.6 percent, the same as in 2006. Employment growth averaged 111,000 a month in 2007, down from 189,000 a month in 2006.

The 5 percent rate for December is relatively low by historical standards. In the recession of the early 1980s, for example, the jobless rate reached double-digit levels.

The White House said the increase in the monthly unemployment rate should be viewed in such a broader historical context.

"I'm not trying to paint the uptick in the rate of unemployment with rosy colors. We'd rather not see it go up to 5 percent, but I think you have to take a step back and look at the broader picture and recognize that by historic standards that's still a relatively low rate of unemployment," Fratto said.

The White House and the Democratic-controlled Congress have blamed each other for not doing enough to stem the fallout related to the housing and credit debacles.

"If there were ever a shot across the bow to this administration to get off its laisser-faire boat and start helping the economy, this is it," said Charles Schumer, D-N.Y. Other Democrats, including presidential contender Sen. Hillary Clinton, called the employment figures troubling and criticized Bush's economic stewardship.

With the economy losing momentum, the White House and some economists at the Federal Reserve predict that the jobless rate will average 4.9 percent this year, compared with last year's 4.6 percent annual average.

The health of the nation's job market is a critical factor in determining whether the economy will survive the stresses from housing and harder-to-get credit. The positive forces of job and wage growth have helped to cushion individuals from all the negative forces in the economy. The big worry is that people will clamp down on their spending and businesses will put a lid on investment and hiring, throwing the economy into a tailspin.

Average hourly earnings for jobholders rose to $17.71 in December, a 0.4 percent increase from November. Economists were forecasting a modest 0.3 percent gain. For all of 2007, wages increased 3.7 percent, down from a 4.3 percent gain in 2006.

High energy prices, though, probably made some workers feel like their paychecks aren't stretching as far as they would like.

To fend off the possibility of a recession, the Federal Reserve cut a key interest rate three times last year. Policymakers are expected to lower rates again when they later this month. Some analysts are predicting a bold half-point reduction in light of the weak employment report.

The Fed's job of keeping the economy expanding and inflation under control, however, is becoming more complicated.

Oil prices briefly marched past $100 a barrel this week. High energy prices are a double-edged sword and they can sap economic growth and also can spread inflation throughout the economy if they cause a rise in the price of other goods and services.

Problems in the economy have elevated fears about a recession. The housing and mortgage markets have melted down. Home foreclosures have soared to record highs and financial companies have wracked up billions of dollars worth of losses from bad mortgage investments. Credit problems have made it difficult for people to finance big-ticket purchases and for companies to expand operations and boost hiring.

Many analysts believe the economy slowed sharply in the final three months of this year to a pace of around 1.5 percent or less. Growth in the January-to-March period also is expected to be weak. Alan Greenspan, former chairman of the Federal Reserve, recently warned that the economy is "getting close to stall speed."

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