The Labor Department reported that the nation’s unemployment rate in August jumped to a near five-year high of 6.1%, versus the market expectation of 5.7%. Nonfarm payrolls shrank by 84,000 in August, more than the 75,000 decline expected by economists. Today’s figures indicate the labor market is deteriorating faster than U.S. central bankers expected, with none of the Fed governors and district bank presidents projecting an unemployment rate above 6 percent. Treasuries gained as some traders bet the Federal Reserve’s next move will be to cut interest rates, rather than raise them, and stocks and the dollar sank based on the weak economic outlook.
On the housing front the news was not much better showing a record 9% of American homeowners with a mortgage were either behind on their payments or in foreclosure at the end of June, as damage from the housing crisis continues to mount, the Mortgage Bankers Association said Friday. New foreclosures were concentrated in eight states: Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana and Ohio, Foreclosures accelerated in the second quarter to the fastest pace in almost three decades as borrowing costs increased and home values fell, prompting more Americans to walk away from homes they couldn’t refinance or sell.
What the experts are saying:
I think today’s unemployment number is consistent with an economy that is either in a recession or struggling real hard to stay out of one,” said Dave Dickens, executive vice president, asset/liability management, U.S. Central
“We’re losing jobs in all kinds of industries now,” Roger Kubarych, chief U.S. economist at UniCredit Global Research in New York, said in an interview with Bloomberg Radio. “This is the clearest recessionary signal we’ve seen.”
The economy “is close to stagnating,” Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, said in an interview with Bloomberg Radio. In part because of continued gains in worker productivity, employers will keep cutting jobs, sending the unemployment rate to 6.75 percent next year, he said.
“In short, grim,” Ian Shepherdson, chief U.S. economist at High Frequency Economics, said of the report.
What you should be doing:
With the double blow of housing and jobs, the economy is going to really struggle. High prices due to inflation and falling house values were manageable as long as people had jobs. However, once folks starting losing their jobs and cannot afford their housing or living payments then the housing crisis and subsequent economic fallout is going to get much worse. This is already being reflected by the ongoing weakness in stock markets everywhere and it is time to review your holdings – if you haven’t already.
Your stock and fund holdings are probably already down significantly by now anyway. But you really need to review each of your holdings in detail and determine if it is one that will make it through in the longer term, if not then consider selling it. If you don’t need the cash now, the best bet is probably to hold on to your core investments (for the long term) with the hope that they will recover in time. Don’t be afraid to sell though. Even if you have to take some losses, look to sell stocks in the financial sector that have weak balance sheets or are heavily exposed to the housing sector. Now is not the time to buy unless you are an active trader/speculator.
The other aspect you must focus on now is to build up your emergency funds/reserves to prepare yourself in the event of a job layoff, ongoing higher prices in everyday items or other adverse economic situations. Most experts say you should have 3 to 6 months of emergency funding, I say make it 1 years worth of funds that you can get your hands on within a day or two. Also, put your cash funds in a FDIC insured high yield savings account (see recommendations) to at least earn some interest and partly fend of rising inflation. To get the emergency funds you may need to consider selling some part of your investment portfolio. It may be better to sell sooner rather than later as well, because your portfolio’s value will most likely keep going down in the short term.
I know I have painted a bleak picture and some may say I am being overly pessimistic. However, I strongly believed that stable employment was a key factor keeping a deep recession at bay or under control, but with unemployment now jumping sharply above expectations and the Fed forecasting tough times ahead (see Beige book review) it is time for caution and prudent risk management approach.
Article sources and references: Marketwatch, Bloomberg , AP