Unemployment expected to rise

Many economists and investors agree the economy's lowest point was the last year's fourth quarter and expect some recovery over the new year. But many argue that the pattern of the recovery will be somewhat different from business cycle recoveries since World War II. \nThe assumption is based on the unprecedented economic boom of the 1990's, which was partly caused by over-heated investments. \n"This recession differs considerably from those in the past in that it is a business-led recession generated mainly by the consequences of a boom-bust cycle in business investment and the accompanying decline in equity prices," said William C. Dudley, Director of the Economic Research Group at Goldman, Sachs & Co., in BusinessWeek. \nOver-heated investment caused the Japanese economy to fall into a decade-long slump. Even though related factors caused the current U.S. situation, economists are reluctant to call the U.S. situation a "Bubble Economy" (another name for an over-investment phenomenon) because they fear relating it to the Japanese situation. \nDue to over investment and capital spending during the unprecedented economic boom of the 1990's, manufacturing industries these days need to slash excess production capacity and inventories. Excess of capital equipment, inventory and labor force cause abundant fixed cost structures that hinder the profit margins of companies. \nSince the excess operation caused too much inventory that is not likely to be sold during this down turn, companies are trying to reduce them with many different discount offers or financing offers to the consumers. Recent efforts to reduce inventory are the result of a remedy to the excess production. Zero percent financing of auto sales in an effort to get rid of old models is a classic example. \nTrimming excess capacity structure is under way in labor forces too. Recent big layoff news is consistent and expected to continue until the first quarter of the new year at least. December unemployment rate rose again to 5.8 percent from 5.6 percent from the previous month. Specifically, the durable goods manufacturing sector's unemployment rate was one of the major factors for the increased unemployment, which has increased stiffly to 7.2 percent in December 2001 compared to 5.8 percent in December of 2000. \nThe Conference Board's Help-wanted Advertising Index continues its declining pattern. The index is a key barometer of America's job market because it measures help-wanted advertising volume in 51 major newspapers across the U.S. every month. It is now 45 points, which is one point lower than the previous month, and 30 points lower than it was one year ago. \n"The overall level of the Help-Wanted Index is as low now as it has been in almost four decades. The trend in job advertising suggests that new hiring will be kept to a bare minimum through early 2002," said Conference Board Economist Ken Goldstein in a Dec. 27 press release.\nAlso, industry production level for the manufacturing sector has been declining with consistency for more than a year since June 2000. June 2000's level was 154.32. However, Nov. 2001's level was 141.68. \n"Manufacturing activity weakened further in nearly all regions in late October and the first half of November. More than two-thirds of the districts reported that new orders and production decreased or grew more slowly," the Federal Reserve Board's Beige Book reported last week.\nCapacity utilization now stands at 73 percent. Capacity utilization is the percentage of U.S.'s production capacity that is being utilized. \n"After consecutive decreases of 0.9 percent in September and October, manufacturing output declined 0.2 percent in November. The overall factory-operating rate slipped 0.2 percentage point to 73.0 percent, a level 6.2 percentage points below its year-ago level and 8.1 percentage points below its 1967-2000 average," the Federal Reserve Statistical Release said. \n"Weakened global demand for capital goods adds to the lack of domestic capital spending tied to the profit recession and the exploded investment spending bubble. The result is tremendous manufacturing slack and the lowest capacity utilization rate in two decades," said Briefing.com, a group of Internet based economic analysts. The decline is expected to continue until early 2002. \nAlthough economists generally agree that the worst part of this recession is over, and the recovery is under way, it will be slow and weak. The main reason is the manufacturing industries' dieting process. This process is an effort to get rid of the fat they accumulated during the 1990's exuberant economy. The strong recovery may not be visible until most manufacturing business sectors finish trimming over capacity structure as the result of the excess capital spending. \nMost of economists lowered 2002 expectations after having seen continuous shrinkages of the manufacturing sector. They generally lowered GDP growth for the new year from the 2002 forecasts done three months earlier. \n"In the first quarter of 2002, the forecasters expect the economy to grow at an annual rate of just 0.1 percent. These forecasts represent sharp downward revisions from the forecasts of three months ago, when the forecasters anticipated growth at an annual rate of 2.8 percent in the fourth quarter and 2.7 percent in the first quarter of 2002," according to the 29 forecasters surveyed by the Federal Reserve Bank of Philadelphia.\nIncreased pessimism on the unemployment front accompanies the downgraded outlook for economic growth. The forecasters now expect the unemployment rate to average 4.8 percent in 2001, up from 4.6 percent in the last survey, and 6.0 percent in 2002, up sharply from 4.9 percent in the last survey. The forecasters calculate that the unemployment rate will rise gradually over the next four quarters reaching a peak of 6.1 percent in the third quarter of 2002 before falling to 5.9 percent in the fourth quarter of 2002.\n"Since 1945, growth of 5 to 7 percent has been common in the year following a downturn. But there are good reasons why this particular recession could end rather sluggishly," said staff writers in the December issue of The Economist.