Double Dose of Trouble as Jobs Fall, Deficit Rises

By: William Neikirk

Americans received a one-two punch of bad economic news Friday with fresh reports of rising unemployment and a federal deficit soaring under President Bush's budget.

The numbers in both cases were stunning. Both posed a major challenge for the government as it tries to get the struggling economy moving again and bring a surging budget deficit under control.

Chilled by winter and the winds of war, the U.S. job market in February took a sharp turn for the worse as employers slashed 308,000 workers from their payrolls, many more than expected, the Labor Department reported.

The unemployment rate, which had fallen in January, edged up to 5.8% of the work force last month from 5.7%. But long-term joblessness rose, and the government reported that the pool of discouraged workers is expanding.

Analysts said there is a danger that the U.S. economy could stall unless the uncertainties of war are resolved and lagging business investment picks up. "The economy is not well", said Sung Won Sohn, chief economist at Wells Fargo Bank.

The nonpartisan Congressional Budget Office added to this dismal picture by reporting that Bush's new tax cuts, his military spending, Medicare reforms, and other programs could produce deficits of $1.82 trillion over the next 10 years.

That total does not include the cost of a possible war with Iraq and its aftermath, estimated from $50 billion to as high as $200 billion.

By contrast, the Bush administration had projected that the budget would show an $891 billion surplus over the next decade. Only Thursday, Treasury Secretary John Snow had called the budget deficit "manageable". After a few years in the red, he said, the deficit would decline and the budget would return to the black.

Not so, the nonpartisan budget office said.

The worsening deficit picture poses a political dilemma for the administration in its quest for a new round of tax cuts to give the economy a kick. Snow told reporters Thursday that a stronger recovery will bring in enough tax revenue to lower the deficit in a few years.

With release of the new jobless report Friday, Snow said it "underscores the importance of swiftly enacting President Bush's jobs and growth plan, which will give our economy a much-needed boost and help Americans find work".

But the deficit report complicates the administration's effort to pass the new tax bill. Some Republicans in Congress have grown skittish about the growing deficit problem and its potential political impact.

Democrats pounced on the two reports to blame Bush for the increase in unemployment and to criticize the administration for a budget that will produce large deficits over 10 years, putting the budget deep in the red just as the Baby Boom population begins to retire.

"The Bush administration's tax and spending policies don't add up, don't come close to adding up, and according to CBO's data, never will", said Sen. Kent Conrad (D-ND), the top Democrat on the Senate Budget Committee.

Analysts Surprised by the Data

The February unemployment report surprised many analysts who had predicted a modest improvement in the jobs picture.

"It was a shock, not only to me but to the markets as well", said Brian Wesbury, chief economist at Chicago-based Griffin, Kubik, Stephens & Thompson Inc., an investment banking firm.

Carl Tannenbaum, chief economist at Chicago's LaSalle Bank, said the carnage in the job market will "raise the temperature on the Federal Reserve" to consider another interest rate reduction when it meets March 18.

Many analysts now believe there's a 50-50 chance the Fed will reduce interest rates again, he said.

The loss of 308,000 jobs was the highest since employers cut 327,000 workers from payrolls in November 2001 in the wake of the attacks on the World Trade Center and the Pentagon.

The job reductions cut a broad economic swath. Goods-producing companies reduced payroll employment by 104,000, including 53,000 in manufacturing. Services jobs, including those in retail trade, plunged by 204,000.

Tannenbaum said the report indicated widespread consumer and business uncertainty. "If one objective of our enemies was to create fear that would disrupt our economy, in that [goal] I think they have been successful", he said.

Average Earnings Increased

There was one bright spot. Average hourly earnings for production and non-supervisory workers rose 11¢ to $15.08, an indication that income and consumer spending are holding up.

On a month-to-month basis, the payroll report compiled by the Bureau of Labor Statistics is considered the most reliable indicator of the jobs market. The Bureau surveys about 300,000 firms employing 37 million people.

Since March 2001, said Karen Utgoff, commissioner of the bureau, total payroll employment has declined by 1.9 million.

In determining the monthly unemployment report, the bureau surveys 60,000 households to determine the job status of Americans actively seeking work.

The so-called household survey showed that there are now 450,000 discouraged workers in America, people who have not actively sought work for the past four weeks. They are not counted in the official unemployment statistics.

Utgoff said that since fall 2000, the number of Americans out of work 27 weeks or longer has tripled. In February, she said, 1.9 million Americans, or 22% of total unemployment, had been out of work 27 weeks or longer.

Wesbury said several special factors influenced last month's rising joblessness. He included the colder winter, terror alerts, higher oil prices, and uncertainty over war with Iraq. "Put all these together, and it was easy to understand why businesses were reluctant to expand or had a greater willingness to cut costs", Wesbury said.

Another factor was the call-up of more reservists for a possible war in Iraq. But the Bureau of Labor Statistics said it could not quantify its impact.

Fred Breimyer, economist at Boston's State Street Bank, said: "This is an economy that has struggled to grow in 2002 and now into 2003. It has not been able to gain traction. If anything, it may be losing traction."