Unemployment, a real stress test for U.S. economy

Special Report:Global Financial Crisis

¡¡by Xinhua writer Liu Lina

BEIJING, April 29 (Xinhua) -- The news of further layoffs by big companies and the increasing concern about swine flu are casting new shadows over the U.S. economy. As new college graduates are pouring into the labor market, job creation becomes a real "Stress Test" for the U.S. government.

JOBLESS NEWS KEEPS GOING

According to General Motor's updated viability plan unveiled on Monday, 21,000 hourly workers will be shed by 2010. Salaried employees are also expected to be cut further.

The struggling auto giant is not the only big employer that joined the laying off trend that has worsened since the outbreak of the global financial crisis last September. Leading Internet company Yahoo said on April 21 that it would cut 5 percent of its global workforce following a significant drop in the first quarter results. Apple Inc., the iPod maker was reported by Dow Jones News Agency on April 23 that it secretly dismissed about 1,600 full-time jobs.

"The unemployment rate will worsen. According to our research, the potential unemployment rate, which includes people who were finding jobs a year ago and many part-time workers, is about 15 percent," said John Challenger, CEO of Challenger, Gray Christmas, Inc., the U.S. premier outplacement consulting firm, in a recent interview with Xinhua.

The Labor Department said on April 23 that initial claims for unemployment compensation rose to a seasonally adjusted 640,000, up from a revised 613,000 the previous week. That was slightly above analysts' expectations of 635,000.

In another sign of labor market weakness, the number of people continuing to claim benefits rose to 6.13 million, setting a record for the 12th straight week, and the total jobless benefit rolls are the highest since January 1983.

A double digit unemployment rate in 2010 is widely predicted by economists.

"This summer will be a real hard time for the U.S. economy since nearly 6 million college graduates are entering the work force, inflicting a great pressure on the labor market," said Huang Jing, former senior researcher at the Washington-based Brookings Institute told Xinhua.

ECONOMIC OUTLOOK REMAINS CHALLENGING

In February, the Obama administration predicted that the economy would shrink 1.2 percent in 2009. Again, the forecast would probably fall behind the curve.

OECD projected at the beginning of April that the world economy would contract by 3 percent, and world trade would decrease 13.2 percent.

In the World Economic Outlook report released on April 22, the International Monetary Fund (IMF) projected that the U.S. economy would contract by 2.8 percent in 2009. This is the third consecutive times that the organization lowered its forecast for the U.S. economy within six months.

A latest survey released by the Wall Street Journal showed that economists forecasted that the economy will not be able to recover enough to bring down unemployment until the second half of 2010.

The economists' forecasts indicate that the peak in the unemployment rate is likely to coincide with the midterm elections that will decide which party controls Congress -- possibly bad news for Democrats. Even if the economy is growing, Americans still will be feeling the effects of the recession and could blame the incumbent.

The first-quarter gross domestic product report, due from the Commerce Department on Wednesday, could offer some clues about what a recovery might look like.

Economists think GDP shrank at an annual rate of 4.6 percent in the first quarter, one of the worst since World War II, but not as terrible as the 6.3 percent shrinkage in the fourth quarter of 2008.

¡¡¡¡NEW UNCERTAIN FACTORS ARISE

As people are wondering where the U.S. economy might go following the report of mixed economic index in April, an unexpected epidemic disease brings new uncertain factors to the world economy. The outbreak of swine flu triggers worldwide alert in recent days.

"Fears over swine flu threatened to knock a vulnerable global economy into deeper turmoil, hammering travel and tourism as nervous consumers and businesses delayed spending plans," reported the Wall Street Journal.

Spooked investors dumped airline shares Monday, fearing airline finances might suffer a new blow.

"This certainly could exacerbate the recession," said Sherman Chan, an economist with Moody's in Australia. "The next couple weeks will be crucial. If this (swine flu) persists it could become a more serious concern and really cripple the economy."

In a worst-case scenario, the U.S. economy would shrink by an extra 0.3 percent this year, on top of a predicted 3.5 percent decline, says Brian Bethune, economist at IHS Global Insight.

This will inevitably transmit into the labor market and exert more stress on the spending of consumers.

Although one of the crucial goals of President Obama's New Dealis to create jobs, historically, employment always lags behind the recovery of the economy from a recession.

One of the biggest worries facing economists is what would happen if unemployment rises beyond expectations and unleashes another wave of spending contractions and lower corporate profits.

At present, the world is expecting the final result, due on May4, of the stress test of the big U.S. banks, which seems to be not that positive as the share prices of Bank of America, Citi group and other banks fell Tuesday. However, the news about unemployment might be a bigger concern that deserves close watching.