This morning's employment report for September is the worst yet for this cycle, and we'll probably see even deeper pain in the months to come. But for now, the last shred of hope that maybe, perhaps, somehow the U.S. could avoid recession has been definitively dashed, once and for all in today's jobs update.
Nonfarm payrolls slumped by 159,000 last month, the biggest monthly loss for the labor market in five years and the ninth straight month of red ink for job destruction, the government reports. That's a sharp drop down from the relatively moderate losses we've seen previously, as our chart below shows. Although unemployment was unchanged at 6.1%, the steady jobless rate for September should fool no one. The message from the labor market is clear: The one-year-old financial crisis is now taking a bigger toll on the broader economy, and the pain is still gathering steam and cutting deeper.
The mounting troubles for the economy have been bubbling for some time, of course, as we have chronicled throughout this year. Back in March, we laid out the case for why a recession was virtually certain. Unfortunately, the corroborating evidence has continued to pile up since then. Earlier this week, for instance, we learned that car sales and factory orders suffered hefty declines last month, adding more signs that there's still plenty of trouble ahead.
The unwinding is upon is, and there's not much that the Federal Reserve can do now to ease the pain. Cutting interest rates at this point won't help much beyond the margins, although some are calling for cut in Fed funds to 1% from the current 2% and there's a sense that the cut could come before the FOMC is scheduled to meet on October 28 and 29.
"Cutting short rates as close to zero as possible," writes Ian Shepherdson of High Frequency Economics in a note to clients today, "is a key ingredient of the policy mix required to prevent a pre-depression economy becoming a real depression economy."
But let's be clear: This process will roll on until it's had its way. The government can help some by, say, extending unemployment benefits and buying up those securities from financial institutions that no one else wants. There's some additional insurance in dropping interest rates too. But no one wants to lend, and consumers are cutting back on non-essential purchases, and so borrowing at any price looks unappealing for most folks. That defensive posture's not likely to change anytime soon, and therein lies a key part of the challenges that await.
One of the few bright spots in all of this is the continuing fall in oil prices. The NYMEX November '08 contract for crude, for instance, is currently in the low-$90 range, which is near the lows for the past 12 months. Lower energy costs will help ease the financial pain weighing on Joe Sixpack. But even continued price declines in gasoline, heating oil, etc. — assuming that's coming — won't be enough to turn around the pain bubbling elsewhere in the economy.
Ultimately what's needed to change the economic tone is an upturn in sentiment among consumers, investors and businesses. That will come, but not until deep into 2009 at the earliest. And that's the optimistic outlook.
For now, the die is cast. It's unclear how deep and how long the economic correction will be. October promises to be a critical month in providing clues about how this downturn plays out in the coming quarters (years?).
For now, however, it's going to be a long weekend, no doubt the first of many. It's time, dear readers, to pace yourself and keep an eye out for opportunity in the capital and commodity markets. But patience is essential, along with a cool head.