Dollar slips, Payroll losses slow and Jobless Rate Increases

The dollar ended slightly lower Friday after a report showing rising U.S. unemployment. The 16-nation euro rose to $1.4309 in late New York trading from $1.4251 late Thursday, while the British pound gained to $1.6397 from $1.6320. Meanwhile, the buck rose to 93.02 Japanese yen from 92.57 yen. On Friday, the Labor Department said the country's jobless rate rose to 9.7 percent in August, its highest level since 1983, from 9.4 percent in July. Many private economists, and the Federal Reserve, expect the unemployment rate to top 10 percent by the end of this year.

But the government also said the economy shed 216,000 jobs last month, which is the smallest amount of jobs cut in a year. The buck might have slipped today, but a deteriorating employment situation will continue to prop up the dollar and the yen, said Dan Cook, senior market analyst at IG Markets, in a research note. The dollar and the yen tend to gain on investors' "risk aversion," when bad news on the economy drives them to seek safety in cash and short-term government debt.

On Thursday, the European Central Bank left its key interest rate steady at 1 percent, and said it saw signs of moderate growth in the euro zone. It also raised its outlook for the region's economy. The ECB's interest rate is still higher than the Federal Reserve's set rate near zero. Higher interest rates can support a currency as investors move funds to where they earn higher returns. The dollar slipped to 1.0605 Swiss francs in late trading from 1.0626 francs Thursday, and dropped to 1.0862 Canadian dollars from 1.1039.

However the pace of U.S. job losses slowed in August while the unemployment rate reached a 26-year high, signaling the recovery from recession will be slow to develop. Employers cut payrolls by 216,000, fewer than forecast, after a 276,000 drop in July, Labor Department data showed today in Washington. The jobless rate rose to 9.7 percent; the so- called underemployment rate -- which includes part-time workers who’d prefer a full-time position and people who want work but have given up looking -- reached a record 16.8 percent.

Friday’s figures stoke concern that the recovery forecast to take hold in the second half of the year won’t prompt a turnaround in the job market until 2010. With the ranks of long- term unemployed nearing 5 million, workers are at risk of losing skills, making it even tougher for them to eventually find work. “The economy is no longer detonating, but we are still losing jobs,” David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto, said in an interview with Bloomberg Radio. “It’s going to be a very tough environment for the consumer.”

The Standard & Poor’s 500 Index closed up 1.3 percent at 1,016.4. The yield on the benchmark 10-year note climbed to 3.44 percent at 4:32 p.m. in New York from 3.35 percent yesterday. Still the rising joblessness underscores Treasury Secretary Timothy Geithner’s judgment this week that it’s “too early” to start exiting from the unprecedented stimulus measures aimed at stabilizing the economy.

AMR Corp. and Whirlpool Corp. are among the companies continuing to cut staff to lower costs and revive profits in the aftermath of the deepest recession since the 1930s. “The labor market lags behind the rest of the economy, so we are first going to have to see positive GDP growth,” Christina Romer, chairman of the White House Council of Economic Advisers, said in a Bloomberg Radio interview. While 9.7 percent unemployment is “a tragedy,” Romer noted that the pace of job losses has slowed from 741,000 in January. Romer said the Obama administration’s $787 billion fiscal stimulus is working to boost growth and declined to comment on whether a second effort will be needed.

Revisions subtracted 49,000 from payroll figures previously reported for July and June. The drop for July is now calculated at 276,000, compared with the 247,000 previously reported. Payrolls were forecast to fall 230,000 in August according to the median of 79 economists surveyed by Bloomberg News. The jobless rate was projected to rise to 9.5 percent. Analysts in a monthly Bloomberg survey projected the jobless rate will reach 10 percent by early 2010 and average 9.8 percent next year.

The latest numbers brought total jobs lost since the recession began in December 2007 to 6.9 million, the biggest decline in any post-World War II economic slump. Among the 14.9 million unemployed Americans in August, 4.99 million were out of work for more than 26 weeks. The percentage of jobless who weren’t classified as on temporary layoff rose to 53.9 percent, up from 39.1 percent a year ago.

“Layoffs that we’re having are more structural and not cyclical, and that makes it more difficult to have a meaningful rebound in income growth, which is a key ingredient as I said for sustainable self re-enforcing expansion,” said Tony Crescenzi, a market strategist and portfolio manager at Pacific Investment Management Co., manager of the world’s biggest bond fund. All major job categories recorded losses in August, with construction payrolls tumbling 65,000, factories cutting another 63,000 and retailers firing 10,000 people.

Whirlpool, the world’s largest appliance maker, is among those firms still eliminating positions. The Benton Harbor, Michigan-based company said Aug. 28 it will close its Evansville, Indiana, manufacturing plant, resulting in the elimination of 1,100 jobs. Fort Worth, Texas-based American Airlines, a unit of AMR, said this week it will furlough 228 flight attendants and put 244 more on involuntary leave. So Federal Reserve officials had “particular” concern about the job market when they met Aug. 11-12, minutes of the gathering showed this week.

“Long-term unemployment and permanent separations continued to rise, suggesting possible problems of skill loss and a need for labor reallocation that could slow recovery in employment begins to expand,” the Fed said in the minutes released Sept. 2. Therefore the Federal Reserve policy makers waited at least a year after unemployment peaked before raising interest rates in the aftermath of the previous two recessions. Chairman Ben S. Bernanke, credited with preventing a second depression in winning nomination by President Barack Obama for a second term last month, has overseen a $1.2 trillion expansion of the central bank’s balance sheet to combat the credit crisis.

So Friday’s report also showed the average work week held at 33.1 hours in August. Average weekly hours worked by production workers remained unchanged from the month before, at 39.8 hours, while overtime also held at 2.9 hours. That brought the average weekly earnings up to $617.32 from $615.33. “We’re still going to see some months of job cuts,” said Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts. “There is a whole range of options, like adding shifts or hours, that companies can put in place until it becomes necessary to hire people back.”

Workers’ average hourly wages rose 6 cents, or 0.3 percent, to $18.65 from the prior month. Hourly earnings were 2.6 percent higher than August 2008. Economists surveyed by Bloomberg had forecast a 0.1 percent increase from the prior month and a 2.2 percent gain for the 12-month period. The U.S. recession “is bottoming out” and the economy is poised for “a slow return,” Alcoa Inc. Chief Executive Officer Klaus Kleinfeld said in a Sept. 2 interview. The head of the largest U.S. aluminum producer said government stimulus in the U.S. and China will affect the New York-based company’s earnings “positively” this year.

Nonetheless, yesterday’s jobless report only adds to the anxiety of millions of Americans who are becoming frustrated with the job market and the state of the economy. Therefore as the dollar slips and payroll losses slow, it seems as if the U.S. economy is not much closer to being out of the dark unless the value of the dollar increases and job creation is developed. These are key to any economic recovery in this nation.

Still the Great Economic Recovery Hunt has been underway for over a half a year, and the quarry bag is still pretty empty. A few optimists have tried to wring hope from fuzzy statistics showing that retail sales or housing starts or some other indicator aren’t as bad as they could be. But with the unemployment rate at 9.7 percent and going higher, that’s been unconvincing.

A recovery that will actually feel like one is probably a year away, at best. But we may finally be seeing signs that some parts of the economy are turning the corner. Here are six:

1. Booming bank profits. Goldman Sachs earned a scorching $3.3 billion in the second quarter. JP Morgan Chase earned $2.7 billion. Citigroup and Bank of American reported less impressive numbers, but each still turned a profit despite mounting losses on consumer loans. To be clear, the banks’ profits have been subsidized by the government’s TARP program and a bunch of other emergency measures meant to provide very cheap capital to the banks. And it’s obviously problematic that a few Wall Street banks are earning a fortune with taxpayer assistance. But the whole financial bailout was intended, first of all, to get the nation’s financial system back on its feet. One toe at a time, it’s happening. The real test is whether a healthier financial system will help the broader economy recover—or bankers just gorge on the profits, keeping loans as tight as ever.

2. CIT’s lonesome meltdown. Last fall, the feds were so panicky about the economy that just about any bank in a whiff of trouble got bailout funds. The CIT case suggests that the bailout spigot is finally closing. CIT Group is a nonbank lender that services a lot of small- and medium-sized businesses. It’s lost almost $3 billion over the last year and is at risk of declaring bankruptcy. So far, despite company pleas, the government has refused to toss a life preserver. If CIT goes belly-up, it could harm hundreds or thousands of businesses dependent on its loans. But unlike last fall, the government isn’t jumping in just to prevent borrowers and investors from worrying. We already have systems designed to deal with failing companies, like the bankruptcy process and FDIC takeovers. Letting those run their course might cause some pain, but it’s a sign that the system is once again working the way it’s supposed to.

3. The Federal Reserve’s reality check. The Fed has finally joined the mainstream in its outlook for job losses, after months of optimistic projections that seemed out of touch with the real economy. T he latest Fed projections are for the unemployment rate to range from 9.8 percent to 10.1 percent for all of 2009, which means it will peak at some number higher than that over the next few months. The Fed’s prior forecast was about 0.6 points lower. It’s not good news that the Fed sees a worse job outlook than it did a few months ago. But the Fed’s rosy numbers were falling behind reality, making its projections seem more like government propaganda than the combined wisdom of the nation’s economic cognoscenti. More realistic numbers give the Fed’s outlook more credibility—and that is good news, especially since the Fed board members also predict that economic growth for the rest of the year will be a bit stronger than they believed a few months ago. It would be nice to believe that.

4. The glacial P-PIP rollout. Relax. You’re forgiven if you can’t remember—or never knew—what the government’s Public-Private Investment Partnership was supposed to do. This is the plan to subsidize the purchase of “toxic assets” (now lovingly known as “legacy assets”) from banks, to get the worst money-losing investments off their books so they’ll start lending money again. It’s a complicated program funded by—you guessed it—taxpayer money, with dubious prospects that the money will be returned. Anyway, the P-PIP isn’t officially dead, but it hasn’t kicked off yet either, and it’s a couple of months past the original estimated start date. It turns out most banks have been able to raise money on their own, which could eliminate the need for yet another government life-support program. If P-PIP fades away with little notice, few will complain.

5. 500 failed banks. Don’t’ worry, they haven’t failed yet, but FDIC chief Sheila Bair may have told a group of senators that 500 additional banks could close before the financial meltdown is over. That’s according to Republican Sen. Jim Bunning of Kentucky. The FDIC typically doesn’t predict bank failures, and an FDIC spokesperson has been downplaying the number and saying Bunning got it wrong. But it’s plausible. Many more banks than that failed during the S&L bust of the ‘80s and ‘90s, and even 500 failures would constitute a small chunk of the 8,000 or so banks in the United States. Here’s the important thing: Last fall, a rumor like this would have sent the markets plunging. This time, the markets didn’t even notice.

6. Action at AIG. The disaster-prone insurance giant recently sold a car-insurance division for nearly $2 billion, and it’s rumored to be close to selling its valuable American Life Insurance Co., or Alico, to MetLife, for $15 billion or more. This is great news for taxpayers who have lent AIG more than $80 billion so it can wind down its business without triggering a panic. The only way for taxpayers to recoup their money is for AIG to sell off its assets at the best possible price. Since last fall, the only bidders have been bargain-hunters hoping for fire-sale discounts. But a thaw in the credit markets has finally brought out serious deal-seekers. We could even see bidding wars for some AIG assets. Ah, the good old’ days.

Now if all of this happens than we will see a true economic recovery happen. Still though, all of this probably will not signal that our the unemployment rate would lower but many economists believe this could be the beginning of more industries particularly in the financial sector to begin hiring again as a result of more business due to the economy climbing and recovering to normal status again. So let’s hope this is the case.