U.S. Congress Joint Economic Committee; Chairman, Sen. Charles Schumer; Vice Chair, Rep. Carolyn Maloney

WEEKLY ECONOMIC DIGEST: August Job Report Renews Recession Fears

September 9, 2008

ECONOMIC NEWS: August Job Report Renews Recession Fears

The August employment report posted the eighth straight month of net job losses, with 84,000 jobs lost in August, and a total of 605,000 jobs lost thus far in 2008. (See Chart)   Manufacturing employment fell by 61,000 jobs in August, with the motor vehicles and parts industry alone losing  39,000 jobs.  Employment in wholesale and retail trade continue to fall, with motor vehicle and parts dealers shedding 14,100 jobs this month and automobile dealers losing almost 12,000 jobs.  Since its peak in 2007, employment in motor vehicle and parts dealers has fallen by 60,000.  These job losses should come as no surprise, given recent data on automobile sales.  In August, the daily sales rate for domestic cars was down 12.1 percent from the previous year and domestic light truck sales were down 21.9 percent.

Job losses related to the housing crisis continue with losses of 7,000 in both the wood products industry and the furniture and related products industry. Total construction job losses in August were 8,000 with residential specialty trade contractors losing 14,200 jobs.  Finally, employment services lost 53,400 jobs.  Since its most recent peak in August 2006, the employment services sector has lost 419,000 jobs.

The unemployment rate jumped in August from 5.7 to 6.1 percent as the number of unemployed persons rose by 592,000 to 9.4 million in August.    In the week ending August 30, initial jobless claims were 444,000, an increase of 15,000 from the previous week's revised figure of 429,000, which brings the 4-week moving average of initial jobless claims to 438,000. In August, the number of long-term unemployed (those jobless for 27 weeks or more) rose by 163,000 to 1.8 million, an increase of 589,000 over the past 12 months. 

IN FOCUS: Why The GSEs Required Support

Since the middle of last year, when losses on subprime mortgages created financial disorder, Fannie Mae and Freddie Mac have sustained the mortgage markets.  Because of the previously implicit backing of the federal government, investors continued to fund mortgages via residential mortgage backed securities (RMBS) issued and guaranteed by the two GSEs.  Investors have been far less willing to buy securities without these guarantees.  In 2006 Fannie and Freddie issued or guaranteed 37 percent of all RMBS.  By the fourth quarter of 2007 their share had increased to 75 percent.

Despite the support that Fannie and Freddie have provided to the housing market, housing prices have continued to decline.  And declining house prices have severely harmed the outcomes of existing mortgages.  Data from the Mortgage Bankers Association (MBA) on delinquency and foreclosures, released last Friday, show continued deterioration. The share of all loans 30 days or more delinquent reached an all time high of 6.41 percent in the second quarter, and the percentage of homes in foreclosure rose to 2.75 percent, nearly three times the level reached in 2006, near the peak of the housing bubble. (See Snapshot)

These developments have inflicted heavy financial losses on the two GSEs.  At the end of the second quarter of 2008 both reported substantial losses.  The loss at Fannie was $2.3 billion, and the loss at Freddie was $821 million.

Losses of this magnitude made Fannie and Freddie creditors nervous.  The losses, significant in themselves, raised questions about what might be on the horizon.  Although both firms continued to borrow the short and long term funds they need to conduct their business, the interest rates they needed to pay were rising.  Moreover, foreign central banks, large holders of GSE debt, began to reduce their holdings.

It was evident that both firms needed to raise additional capital to stay solvent and maintain their ability to borrow.  This would have meant selling preferred or common stock to investors.  But that option had vanished.  Last week Fitch reduced its rating of their preferred stock to BBB-, just above junk status, in the belief that equity markets were unlikely to provide additional funds.

Without additional capital, the firms might have raised operating funds in the short term through asset sales.  But substantial sales of RMBS owned by Fannie and Freddie carried significant risk.  Asset sales could have reduced confidence in the two firms, making it more difficult for them to fund their mortgage lending.  Since for practical purposes they are the mortgage market at this moment, this would have led to further deterioration in the financial markets.

The importance of Fannie and Freddie to the functioning of the mortgage markets is reflected in the scale of support that Treasury has extended.  Treasury is prepared to provide as much as $100 billion in capital to each firm.  The actual amount will depend on what is needed, and the government will receive senior preferred debt in exchange.  Treasury is also prepared to buy mortgage backed securities issued by the two firms.

THE ECONOMY AT A GLANCE

The Economy at a Glance Jun May Apr Mar Q2 2008 Q1 2008 Q4 2007 Q3 2007 2007 2006 2005
Economic Activity        
Real GDP (% growth)         3.3 0.9 -0.2 4.8 2.0 2.8 2.9
Unemployment (% of Labor Force) 6.1 5.7 5.5 5.5 5.3 4.9 4.8 4.7 4.6 4.6 5.1
Labor Productivity Growth (%)         4.3 2.6 0.8 5.8 1.4 1.0 1.8
Labor Compensation Growth (%)         2.6 3.0 3.4 3.1 3.4 3.1 3.3
CPI-U Inflation Growth (%) n.a. 10.0 14.0 7.4 5.0 4.3 5.0 2.8 2.9 3.2 3.4
Core CPI-U Inflation Growth (%) n.a. 3.7 3.7 2.4 1.9 2.5 2.5 2.5 2.3 2.5 2.2

THE WEEK AHEAD

DAY RELEASE
DAY RELEASE
Monday, Sep 8 Consumer Credit (August 2008)
Thursday, Sep 11 Import and Export Prices (August 2008)
Trade Balance (July 2008)
Friday, Sep 12 Producer Price Indices (August 2008)
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