TOPICS > Economy

Unemployment Rate Jumps as Economic Woes Mount

June 6, 2008 at 6:10 PM EDT
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The nation's unemployment rate hit 5.5 percent in May as employers cut some 49,000 jobs, providing a fresh snapshot of a still-struggling U.S. economy. Mark Zandi, chief economist with Moody's, explains the new Labor Department report and what it means for the economy.

JEFFREY BROWN: It was, indeed, all big and all bad: the largest monthly jump in the unemployment rate in two decades; an unprecedented single-day increase in the price of oil; and a Wall Street tumble of nearly 400 points.

Mark Zandi, chief economist at Moody’s, helps walk us through today’s mess.

Well, Mark, start with the job numbers. What details jump out at you in today’s report?

MARK ZANDI, Chief Economist, Moody’s Well, it was unambiguously bad. And of course, the half-point increase in the unemployment rate, that was the biggest one-month jump in over 20 years.

We lost 50,000 jobs. And so far, since the beginning of the year, we’ve lost 325,000 jobs. The job losses are broad-based across lots of industries. Of course, it’s housing and manufacturing, financial services, retailing, transportation.

And it’s all across the country. It’s not just California and Florida. And many parts of the country are now losing jobs, so all of the details were pretty ugly.

JEFFREY BROWN: Did it come as a big surprise to people, this much of a jump?

MARK ZANDI: Yes, very much so. I think everyone was expecting a weak report. Obviously, the economy is struggling, but this was measurably weaker than I think anyone had anticipated.

JEFFREY BROWN: The report at the same time shows a lot of people entering the job market. Now, would that be mostly graduates or young people coming in for the summer or after graduating? And how does that play into the larger picture?

MARK ZANDI: Yes, it was a big increase in the number of people looking for work, particularly teenagers, 16- to 19-year-olds. And they probably stepped into the labor force a little earlier this summer, thinking that it might be a tough job market and that you probably should start looking a little bit earlier than normal.

They probably needed the money. It’s hard to get a student loan because of the financial crisis. And, of course, gas prices are up, and kids are having a hard time driving those cars, and so they need the cash.

So I think that caused them to look a little bit earlier than normal. And that caused the unemployment rate to jump, one of the reasons why it jumped.

Housing sector losses

JEFFREY BROWN: Now, you mentioned some of the hardest-hit sectors. These are the ones that we've been hearing about, mostly from housing and other problems. Expand on that a little bit. And were there any sectors where things held up pretty well?

MARK ZANDI: Yes, the biggest job losses are in housing, mostly construction. The number of housing starts are plummeting, and that's taking construction jobs with it.

Mortgage finance, so anyone who makes a mortgage is out of work. And, of course, that's affecting manufacturing. Anything from plumbing fixtures to lumber and equipment, anything related to housing has been hit hard.

There are a few sectors that are adding consistently: health care, educational services, and government, largely related to education. And those are demographically driven. There is a lot more 48-year-old, 50-year-olds using health care and their kids are 18-year-olds that are using educational services.

JEFFREY BROWN: And for some perspective, because we heard in the news summary the president's spokeswoman talk about this as not being particularly, at least historically, high, 5.5 percent. I guess that's true. So what is it -- is it the direction or the trend that's got everybody worried?

MARK ZANDI: Well, that's right. In the long, historical scheme of things, 5.5 percent isn't overly alarming. But it is up from 4.4 percent a little over a year ago, and the trajectory is all wrong.

And, of course, in many parts of the country, it's much higher than that. So in recessionary states like Arizona, Nevada, California, Michigan, Florida, Rhode Island, the unemployment rate is measurably higher, and it's now rising pretty much everywhere.

Oil remains big factor

JEFFREY BROWN: All right, now, to the next part of this, which is the big spike in oil prices, biggest for a single day ever. What are the explanations out there being offered?

MARK ZANDI: Well, part of it is the decline in jobs. That created a run on the dollar. The dollar fell in value. And, of course, that drives up the price of oil.

Also, because of the decline in jobs and the effect it had on the stock market, investors got spooked, ran out of the stock market, and ran into the only thing that was rising in price, and that was the price of oil.

And then, finally, there are some geopolitical concerns. An Israeli minister, who is in line possibly to be the next prime minister, was doing some saber-rattling with respect to Iran and their nuclear program. And I think that got people unnerved, as well.

So a slew of things came together to drive up those oil prices.

JEFFREY BROWN: Well, a slew of things, because all of those things happen -- they can all happen on any particular day. None of them struck my ear, at least, as so out there to cause this much of a jump.

There's also been a lot of talk about speculation in the markets or people speculating, investors speculating in oil markets more than in the past. Is that playing a role here, too?

MARK ZANDI: Yes, I believe so, yes. The oil market has become a financial market. And it's affected by all kinds of speculators, momentum players, people just betting on prices increasing or falling, in this case, obviously, increasing.

And so they ran in quickly and drove up the price. And that clearly has played a role. I mean, you don't see a $10 move in the price of oil without some financial speculation involved, as well.

JEFFREY BROWN: And that, of course, raises another question about whether we're entering some kind of energy or oil bubble.

MARK ZANDI: Yes, well, in my view, I think a bubble is developing. There is speculation in the market. I don't think -- we're early on in the process. It's not like the housing bubble or the tech stock bubble, but it's growing and becoming more of an issue.

And, certainly, it's something that is very debilitating to the economy. Nothing worse to our economy than rising energy prices.

JEFFREY BROWN: And then how and when do these rising oil prices, the ones we've seen today, translate to what we pay at the pump?

MARK ZANDI: Quickly. If we stay at $135, $140 per barrel of oil, which is where we ended up today, then the nationwide cost for a gallon of gasoline is going to go from $4 where it is today to $4.50, and that will be by July 4th.


MARK ZANDI: By July 4th. And just to give you context, every penny increase in the cost of a gallon of gasoline costs the American consumer about a billion dollars over a year. So we go from $4 to $4.50; that's $50 billion.

We were at $3 at the beginning of the year. And this increase in the cost of gasoline is now swamping the tax rebates many of us are now getting.

JEFFREY BROWN: And presumably that furthers the weakening economy?

MARK ZANDI: Very clearly so. If we have to spend more to fill our gas tank -- and, obviously, food prices are up, as well -- if we have to spend more to buy the same amount of groceries, then we can't spend on everything else, and that's tough for the economy.

A tough day overall

JEFFREY BROWN: All right. So just to complete the triangle here for the day, all of this added up to a really lousy day on Wall Street?

MARK ZANDI: Very bad. Obviously, if you're a stock investor, you want growth. You want companies to do well. You want earnings. And you're not going to get that with this kind of a job market and oil prices going through the roof.

So investors just sold stock. It was just a bad day to be in the stock market.

JEFFREY BROWN: And what does it all add up to you? We've, of course, all been wondering about the recession question. Anything new that you'd -- where you'd place the economy now?

MARK ZANDI: Well, you know, I think we're in recession, but that's a debate among economists and policymakers. For the average American household, there is absolutely no debate. They're worth less today than they were a year ago. Their purchasing power is lower than they were a year ago.

They can't find a job. It's difficult. If you become unemployed, it's tough to get back in. For them, this is recession.

JEFFREY BROWN: All right, Mark Zandi, thank you.

MARK ZANDI: Thank you.