Gloomy?jobs report hints at global downturn

Damian Dovarganes / AP

In this Thursday, May 31, 2012, job seekers gather for employment opportunities at the 11th annual Skid Row Career Fair at the Los Angeles Mission in Los Angeles.

By John W. Schoen, Senior Producer

The gears of the global economy are all slowing in unison.

The latest evidence came with Friday?s startling employment report from the Labor Department: Job growth slowed in May to just 69,000 and was much weaker in April than initially reported. The news followed?a string of reports from Europe to China?showing that growth in world's major economies is fading away.

"Wow, this is ugly,? said Malcolm Polley, president of Stewart Capital Advisors, in response to Friday?s jobs data. ?Some had believed that we had decoupled from China slowing and all the problems in Europe, but that seems to be shortsighted. We're slowing alongside the rest of the world."

There was little good news to be found in Friday?s numbers. After adding more than 200,000 jobs a month in the first quarter, the pace of hiring slowed sharply, to an average of just 73,000 per month in April and May. Analysts say the economy needs to create roughly 125,000 jobs a month just to keep the unemployment rate steady.

The hiring slowdown last month sent the unemployment rate up to 8.2 percent from 8.1 percent, reversing a steady decline that began last summer. Overall, total employment remains about five million jobs lower than the level seen in December 2007, at the start of the latest recession.

The weak hiring complicates President Barack Obama's fight to win re-election, offering his Republican rival Mitt Romney a powerful issue.

"Today's weak jobs report is devastating news for American workers and American families," Romney said in a statement.

The White House called on?Congress to do more to help the economy create jobs.

"Congress has to take some action because while we see the unemployment rate where it is, it's not acceptable,"?Labor Secretary Hilda Solis said on?CNBC.

Hiring was weak across the board in May.?The private sector added just 82,000 new jobs. Governments continued to cut payrolls, slashing another 13,000 positions, as cities and states struggle to balance their budgets.

After unseasonably warm weather boosted hiring earlier this year, construction employment shrank by 28,000 in May, the fourth straight decline. Manufacturing, which has been enjoying a revival in the U.S. this year, added only 12,000 jobs.

Those with jobs saw their hours trimmed and their paychecks lose ground to inflation. Gains in average weekly earnings fell from a recent high of 3.1 percent to just 1.7 percent. Consumer prices were 2.3 percent higher in April than a year earlier.?

?Slicing the lifeblood of spending nearly in half accomplishes only one thing: It slows spending,? said Tom Porcelli, chief U.S. economist at RBC Capital Markets.

Consumers are getting a break at the gas pump as prices slide from a peak of almost?$4 a gallon reached in April. But their paychecks still aren?t covering the bills: A?separate report Friday showed that as personal spending continues to outpace incomes, consumers are borrowing or tapping savings to make up the difference. The savings rate continued to decline in May, falling a tenth of a point to 3.4 percent, to the lowest level in more than four years.

As consumer confidence fades and demand slows, businesses are also pulling back. Investment in machinery and computers has fallen in the last two months, and some regional surveys are showing slower growth in factory activity.

There?s reason for caution. As Europe's financial crisis widens, businesses face bigger uncertainty closer to home with the looming impact of higher taxes and deeper government spending cuts. As the November election approaches, Congress is all but ignoring the year-end deadline to avert the so-called ?fiscal cliff? that economists estimate could shave as much as half a percent from U.S. gross domestic product, which expanded at a tepid 1.9 percent in the first quarter.

As the U.S. has slowed, Europe?s economy has come to a dead stop, with weak growth in Germany offsetting deepening recessions in Greece, Spain and Italy.

On Friday, fresh data showed that eurozone unemployment has hit a record high. Job losses there are expected to continue to climb as the ongoing financial crisis forces businesses to pull back and compels debt-burdened governments to lay off workers.

Some 17.4 million people were out of work in the 17-nation bloc in April, or 11 percent of the working population, the highest level since records began in 1995, the EU's statistics office Eurostat said on Friday.

"This 11 percent level is going to continue edging up in the coming months and probably until the end of the year," said Francois Cabau, an economist at Barclays Capital who sees the eurozone's economy contracting 0.1 percent this year.

Despite efforts by Europe?s central bank to lower interest rates and revive growth, borrowing costs have risen and banks have tightened credit as they hoard cash to weather the crisis. Consumer and business confidence has been sapped by ongoing uncertainty about the financial fallout from Greece, which threatens to destabilize Europe?s banking system and plunge the eurozone deeper into recession.

Slowing demand from consumers and businesses in the developed world are creating headwinds for China?s economy, the last source of growth to support the global economy. Despite wage gains, Chinese consumers still make up a relatively small portion of the Chinese economy, so domestic spending is not strong enough to offset falling demand for exports.

?It is increasingly obvious that we are in the midst of a global economic slowdown,? said Porcelli.

The ominous economic data from around the world raises the prospect that central banks will act to try to revive growth. But it remains to be seen how effective those polices would be. The U.S. Federal Reserve has already undertaken two rounds of pump-priming with massive purchases of bonds to force rates to record low levels.

?(Fed Chairman Ben) Bernanke?s hat is pretty well out of rabbits,? said David Rosenberg, chief economist at Gluskin Sheff.

Related story: First thoughts -- Ouch for Team Obama

"This is not just a soft patch, but we may actually roll over into a mild double dip recession," says Barton Biggs, Traxis Partners, responding to this morning's dismal jobs report and its impact on the economy.

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