Economists See Jobs Decline Ahead of Employment Data

Housing sector declines and rising energy prices will likely offset any benefits from tax rebates as the economy braces for its sixth consecutive decline in employment when the Labor Department releases monthly figures tomorrow morning.

Economists expect unemployment to remain unchanged in June while employers will report they have shed an additional 50,000 jobs, according to the median estimate of economists polled by IFR Markets.

In May, unemployment jumped five percentage points to 5.5%. Many economists said the rise reflects a seasonal fluctuation as students and college graduates finished classes earlier in 2008 and had not yet found summer or full-time employment. Otherwise, the unemployment rate would have been a more moderate 5.2% in May, according to John Lonski, chief economist with Moody's Capital Markets. He said he expects unemployment to "backtrack" in June to 5.4%.

The goods-producing and financial sectors will drag down employment as other industries weigh layoffs due to rising food and energy costs, economists said. The glut of unsold homes on the market, which reached 10.9 months in May, has reduced the demand for new home construction.

The construction sector shed 34,000 jobs in May and 475,000 jobs since its peak in September 2006. Yet non-residential construction has remained consistent and reached an all-time high in May, the Commerce Department reported yesterday. But as the economy weakens, commercial construction may begin to drag the sector down further, said David Wyss, senior economist with Standard & Poor's.

Auto manufacturers have been hurt by surging gasoline prices. Ford Motor Co. and Chrysler LLC have announced plans to temporarily close plants this month. The auto sales slump may be the reason Michigan has the highest unemployment rate at 8.5% in May. Airline companies also slashed jobs in June.

"The goods-producing sector is looking really bad," Wyss said.

Economists are expecting the financial sector to take a hit in June as credit losses force investment banks to cut payrolls. Standard & Poor's estimated in March that banks will end up writing down $285 billion in credit-related losses. Economists said New York City and Charlotte, N.C., may be disproportionately affected because of the concentration of banks in those cities.

Unemployment rates can weaken state and local income tax revenues, which municipalities rely on for general obligation bonds. A sudden, steep drop in employment may threaten a state's credit rating and ability to issue bonds. Rating agencies account for the impact unemployment has on a state's revenue, but it is only one of several factors that determine a credit score, said Edith Behr, a senior credit analyst with Moody's.

Nine states have triple-A ratings from Standard & Poor's and Moody's, and just one, Utah, was among the top 10 lowest unemployment states, which suggests that there is not a strong link between a state's rating and unemployment rate.

Still, the labor market often foreshadows a recession. With payrolls declining and unemployment up 1% from last year, Lonski said the pattern is consistent with recessions since World War II. But he said the severity of job losses during this downturn "has been mild."

"Labor is in a recession, but the depth and decline compare favorably and it is not that severe yet," Lonski said.

Economists said unemployment leads to a decrease in consumer spending, which accounts for two-thirds of the gross domestic product. But damage might be partly mitigated by tax rebates and the economic stimulus checks. The federal government will send out $106.7 billion in rebates in 2008. Lonski said that if Americans spend that cash, it could drive up demand for goods and keep producers from laying off employees.

There is usually a "strong correlation" between labor attitudes reported in the consumer confidence survey and the numbers reported by the Labor Department, according to Paul Kasriel, senior economist with Northern Trust Corp. Consumers expecting fewer jobs in the months ahead increased to 35.5% from 32.3% in the report issued last week by the Conference Board. Kasriel said he expects unemployment is headed up to 6% by the end of 2008.

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