One of the key economic indicators that tell a story behind an economy is the unemployment rate. As of November 2008, the United States has experienced unemployment levels not seen since 1994 as American companies cut back on expenses, slash payrolls, and literally put thousands of workers to “the streets”. This sets the background for the sharpest decline of the economy in decade. It will be tough to get out of this financial rut for many years to come.
The jobless rate in October 2008 rose to 6.5% from 6.1% in the previous month. Companies slashed 240,000 jobs in September and 284,000 jobs in October, the largest two-month loss since 2001. As the surge of job loss continues, the government is pressured to put together an economic plan that will help America’s unemployed.
It is also important to take note that the United State’s financial crisis creates more problems beyond its shores. And it will make it harder for the country to recover. The vicious cycle will continue until the root cause has been addressed.
Japan’s Recession and More Problems
Japan has announced that its economy is now in recession. The country has surprised markets globally by revealing the extent by which the world’s second largest economy has been hit by the economic downturns of the US and Europe markets. The global financial crisis has basically curbed the demand for Japanese exports.
Meanwhile, China has not been invulnerable to the crisis. It announced that it is experiencing economic slowdown. China has revised its projected growth in the coming years as the declining global economy hurts the demand for its products. In addition, oil price has dropped significantly amidst concerns of the strength of its demand.
The economic problems in the United States already have adverse effects in the global economy. Its trade partners are feeling the pinch from shrinking consumer spending. Some of the hardest hit nations include the Canada, the United Kingdom, Germany, France, Italy, Taiwan, Japan, South Korea, Venezuela, Brazil, and Saudi Arabia.
If the United State’s current unemployment rate continues to increase, its major trade partners such as Brazil, China, Venezuela, and Saudi Arabia will be hit in different areas. They will need to deal with decreased American consumer spending, more expensive US exports, higher tariffs and taxes, and the unemployment increase from their home economies during the years ahead.
Citigroup Reduces Workforce by 15%
On the other side of the globe, Citigroup announced that it would a lay-off 52,000 job which is one of the largest job cuts in modern history. Citigroup, the US financial institution with the farthest reach, slashed 15% of its workforce in an attempt to return to profitability. This reduction comes on top of the 23,000 job cuts that have been announced by the institution earlier.
The drastic job cut reveals the extent of Citigroup’s problems. Like most big banks, the financial institution has suffered huge losses due to the collapse of the subprime market. Its efforts to climb out of the situation have been unsuccessful in the adverse economic climate. The 52,000 lay-offs is the second largest in history, it is only exceeded by IBM’s job cut of 60,000 back in 1993. About half of the Citigroup’s job cuts will come from attrition while the remainder will come from the sale of its assets.
Previously, Citigroup’s extensive foreign operations have been the source of its strengths but now it has become a weakness. For example, the recession in Japan is hurting the company because the bank largely depends on consumer banking. With people reigning in their credit card spending and other loan products, it will be tougher for Citigroup to survive.
It is anticipated that Citigroup will need to shoulder further losses because of defaults from unsecure loans. This is one of the reasons why its stocks have fallen by over two-thirds in value in just one year. Its stock value even dropped to a single digit for the first time in a decade. Congress has pledged support to the ailing bank but this help is not sufficient to save the 52,000 jobs that needs to be cut for the time being.
Beyond the financial industry, the auto industry is another sector that may need help. Automakers bore the brunt of the drastic decline in US consumer spending as people deal with their housing problems and job loss. Consumers are no longer interested in buying new cars since they are busy saving their homes and putting their kids through college.
In an effect to contain the fallout, the United States Senate is contemplating a bailout of the three largest auto manufacturers in the country. The Senate wants to begin the legislation that will enable General Motors, Ford Motor Co and Chrysler LLC benefit from the $25 billion in aid. The US government is not only concerned about the “Big Three”, it is also worried about the potential job loss from auto suppliers, auto service centers, and even the whole US auto industry if the three manufacturers fail.
In Europe, the same problems are facing auto manufacturers. Germany has announced that it will talk with Opel though it will not offer assistance to all industries suffering from the financial crisis. Toyota, the Japanese car manufacturer that used to have the rare AAA rating, received a negative rating from Fitch Ratings because of the stronger yen, global downturn, and “unprecedented challenges” in the auto industry.
25-Year High Unemployment Rate and 2009 Projections
It is estimated that the total number of unemployed in America today is at 10.08 million, the highest in 25 years. According to Nariman Behravesh, an economist at the HIS Global Insight, “We’re heading for a deep recession – banish the word mild from your vocabulary – it’s big, it’s bad, and it’s broad-based”.
This view is supported by the Goldman Sachs Bank USA Group Inc. projections as their analysts forecast the largest contraction since 1982. In fact, the economic analyst firm also projects that unemployment rate will rise to as high as 8.5% by the end of 2009.
Many economists expect that the economic downturn today can rival that of 1981-1982. The country’s GDP which has contracted during the third quarter at the rate of 0.5% will recover before the second half of 2009. For job seekers, this means that their chances of getting a job will worsen before it gets better.
An analyst from JP Morgan Chase, Abiel Reinhart, said that “We see unemployment peaking at 8.2% in the second quarter of 2009 but not coming down at all during the year”. Michael Feroli, another analyst from the JP Morgan Chase supports this view by saying that growth has to be at 2.5% levels at the very least to help with the unemployment situation. Though the situation still remains bleak, the Federal Reserve’s plan to pump billions of dollars to the market will provide a safety net that will prevent the economy from getting any worse.
Hardest Hit Sectors and A Few Bright Spots
The job cuts come from all sectors but it is particularly high in the financial, housing, and construction sector. Even retailers are scaling back on their number of workers. The manufacturing sector, already declining for years, experienced even more severe job losses as manufacturing companies struggle to get loans even as consumers continue to spend less on projects and services.
Analysts expect that logistics and transportation companies will be hit next. If consumers are not spending, there is lesser need to move products through freight, trains, and trucks. Already, these firms are cutting jobs to match the decreased demand for their transportation services.
There are also some bright spots in the job market including health care, mining, and education though the demand is not enough to compensate for the job loss throughout the nation. Overall, the job market looks pretty grim. People looking for a job right now will encounter difficulty in getting even part-time jobs.