On Friday, the floor fell out from underneath the U.S. stock market in the wake of the December payroll report. Specifically, the Labor Department reported that seasonally adjusted non-farm payrolls rose by only 18,000 in December, far below economists' estimates of 58,000 to 70,000 jobs. Since the U.S. economy needs to create 100,000 to 150,000 new jobs per month just to keep up with population growth, the unemployment rate rose from 4.7% to 5%. Since 1949, any time the unemployment rate has jumped 0.3% or more in a month, a recession has followed.
Even more disturbing, private-sector payrolls fell 13,000 in December, the first monthly decline in more than four years! This is a result of U.S. business spending virtually evaporating. Even though many U.S. interest rates have fallen, the all-important London Inter-Bank Overnight Rate (LIBOR) remains stubbornly high. Most business loans are tied to this stubbornly high LIBOR, which is one reason business spending has fallen. In particular, goods-producing industries lost 75,000 payroll jobs in December, led by 49,000 jobs lost in construction and 31,000 less in manufacturing. Of 278 industries surveyed, only 48.4% were hiring in December, the first month since September 2003 in which fewer than half of all industries were adding new jobs.
The bright news in the December payroll report is that service-producing industries added 93,000 new jobs, of which 43,000 were professional and business services. Education and health-care remained strong, adding 44,000 new jobs. However, service sector layoffs in the finance industry will likely return soon, so service sector jobs are expected to start falling in the upcoming months.
Due to Friday's devastating payroll report and the sudden contraction in business spending, the Fed is really left with very few alternatives other than to cut key interest rates sooner rather than later. Currently, the Federal Funds rate is at 4.25%, while market rates, based on the 3-month Treasury bill, are currently only around 3.15%. Since the Fed cannot fight market rates for very long, the Fed must get its act together and get in line with market rates as soon as possible.
