The U.S. economy may be much nearer to a recession than was previously thought, based on the Labor Department’s surprising report Friday that the nation lost 101,000 jobs in May, the biggest drop in four years.
In Illinois, the jobless rate fell to 5.5 percent last month from 5.7 percent in April, though the number of people with jobs in the state plunged by 138,000. But the rate improved because the state’s labor force declined even more.
And the clouds over the economy grew thicker with the Commerce Department reporting that its index of leading economic indicators fell in April for the third straight month.
The index is not an infallible tool, but economists say that when it declines for three consecutive months, a recession or a near-miss often follows 6 to 12 months later.
The news rattled experts and investors, many of whom had expected, if anything, a modest increase in employment at the nation’s construction sites and factories.
Even economists who had been downbeat about the economy’s prospects were shaken.
“I’m getting even more scared,” said Lawrence Chimerine, an economist for the Economic Strategy Institute, a Washington think tank, who has been warning for months that the economy was not nearly as strong as many of his colleagues believed.
“Clearly, the risks of recession are rising by the day,” he said. “The job market is obviously deteriorating, and that runs the risk of lower income, which just feeds on itself in terms of lower consumer spending,” resulting in factory shutdowns and layoffs.
The Labor Department said May’s unemployment rate of 5.7 percent was down slightly from April, when 5.8 percent of the nation’s labor force was unemployed. But the decline occurred only because the nation’s work force shrank more than employment did.
And in California, which has been lagging the rest of the nation since the recession in the early 1990s, the jobless rate climbed last month to 8.5 percent from 7.9 percent in April. Among other big states, the rate also rose in New Jersey, Ohio and Texas.
It was the disappearance of a vast number of jobs, however, that took the breath away from economists, investors and policymakers.
The nation’s manufacturers lost 56,000 jobs while the construction industry lost 57,000, though some of the dropoff in the building trades was caused by bad weather, mainly in the South, according to the Labor Department.
Even the normally vibrant service industries sputtered last month, with employment in the sector rising by just 14,000.
Another troubling sign: The median time that people have been out of work lengthened again, to nine weeks in May.
The economy’s startling weakness caused some economists to urge the Federal Reserve Board to cut short-term interest rates in an effort to jump-start the economy.
“In my opinion, the Fed should ease (rates) right now,” said Chimerine.
But Lyle Gramley, a former Fed governor and now a consultant for the Mortgage Bankers Association of America, thought it unlikely the central bank will cut rates soon.
“I think the Fed will simply sit still,” Gramley said.
Despite a string of recent economic reports seemingly showing the economy losing momentum, there are still many signals of underlying economic strength, he said.
Among those signs: Business profits are high while debt is low; the stock market is booming; consumer confidence remains relatively strong; and loan and mortgage deliquencies are at their lowest rates in many years.
The Clinton administration also insisted there was no danger of a recession, but Treasury Secretary Robert Rubin conceded that recent reports of economic weakness were troubling.
“I still think the most likely outcome as we go forward over the next couple of years is what’s sometimes referred to as a soft landing,” he said during an appearance in the South Bronx.
Gramley said the Fed can’t be certain that if it lowered rates, the economy wouldn’t surge. That could create a perfect climate for runaway inflation, a fate the Fed dreads more than unemployment.
