Another U.S. Job Market Setback

Everyone had hoped for a reversal in the shrinking American job market, but it failed to materialize. In December, against expectations, American companies shed more jobs. The markets reacted with shock as stock indices and the dollar fell.

Job losses in the United States continued with 85,000 jobs lost in December. The Department of Labor reported that the unemployment rate remained at 10 percent. Economists had assumed that employment would remain unchanged. After all, the authorities revised the employment numbers upward in November. In that month, there was a net increase of 4,000 jobs, which was the first time that had occurred in almost two years.

Market players initially reacted soberly. Germany’s DAX lost 60 points and fell 0.7 percent after the U.S. employment information went public. The dollar fell significantly against the Euro. Gold increased and oil surged. Later on, the situation settled down. Ulrich Wortberg, a bond and currency analyst at the German commercial bank Helaba, said, “Despite the disappointing numbers, the scenario remains intact for an early end to the jobs crisis. The increasing number of temporary workers is indicative of this, which something that normally runs ahead of total employment. The rebound in the job market is a precondition for the termination of the extremely lax monetary policy.”

The job market numbers are evidence that the U.S. economy, despite many signs of recovery, still remains vulnerable to setbacks. Thanks to increasing orders and exports, companies are indeed beginning to hire workers once again after the largest number of layoffs since World War II. But the tipping point has certainly not yet occurred.

Economists believe that the U.S. recession, which began in December 2007, ended in the middle of 2009. Since then, things have been looking up. In the third quarter, the real gross domestic product (GDP) grew at an annualized rate of 2.2 percent. Some experts consider a GDP increase of four percent to be possible for the fourth quarter with the first estimate being released on January 29th. In 2010, the increase could be in the 3-3.5 percent range.

However, the numbers are not really very good when put into historical perspective. After the recession of 1973-1975, the GDP over the following three quarters averaged 5.1 percent. The U.S. economy even grew at an annualized rate of 7.2 percent after the recession of 1981-1982. Gene Epstein, an economist contributing to the American investment magazine Barron’s said, “By the standards of the past, the current recovery should have ended in the fourth quarter or should end in the first three months of 2010. Instead, it’s not likely to conclude until this year’s third quarter, an indication of how far the U.S. economy has fallen.” U.S. President Barack Obama is assisting the job market with government spending programs. Obama said on December 8th that additional investments in transportation infrastructure, tax credits and inducements to make homes energy efficient should help lower the unemployment rate. But at the beginning of 2009, government economic advisors had still hoped that the unemployment rate would not increase over eight percent because of the staggering $800 billion economic program.

The U.S. Federal Reserve Bank, on the other hand, is holding the base interest rate at 0-0.25 percent. The minutes of the December meeting of the Federal Reserve Open Market Committee revealed that some Fed officials are not ruling out an extension of economic assistance. At the meeting, some Fed members said that if the situation deteriorates, it may be “desirable” to step up asset purchases.

Skeptics primarily appear to be worried that this could cause new problems in the U.S. housing and mortgage markets and lead to a setback for the economy if the Fed ends its assistance and if the government also backs out. The Fed is committed to buy a total of $1.45 trillion mortgage-backed securities after the current program ends by the end of March.