Jobless claims jump unexpectedly to 16-year high

Thursday November 20, 5:04 pm ET
By Christopher S. Rugaber, AP Economics Writer
Further layoffs forecast as jobless claims jump unexpectedly to 16-year high

WASHINGTON (AP) -- With the number of new claims for U.S. jobless benefits hitting a 16-year high, some economists warn of further waves of layoffs in the months ahead.

Even already battered industries such as construction and manufacturing are expected to see more job cuts. Layoffs also are likely to spread to relatively unscathed areas such as retail, transportation and hotels and restaurants.

"I don't think any of these sectors have reached the bottom," said Carl Riccadonna, senior U.S. economist at Deutsche Bank.

The Labor Department said Thursday that new claims for jobless benefits rose last week to a seasonally adjusted 542,000 from a downwardly revised figure of 515,000 in the previous week, much higher than Wall Street economists expected.

That is also the highest level of claims since July 1992, the department said, when the U.S. economy was emerging from a recession. The four-week average of claims, which smooths out fluctuations, was even worse: It rose to 506,500, highest in more than 25 years.

The news contributed to another disastrous day on Wall Street. The Dow Jones industrial average plunged more than 444 points, and broader indexes also sank.

After news of the soaring jobless claims, the Senate approved legislation to extend unemployment benefits through the holidays. The White House said President George W. Bush would quickly sign the bill.

The measure will provide seven additional weeks of payments to those who have exhausted their benefits. Those in states where the unemployment rate exceeds 6 percent would be eligible for an additional 13 weeks, for a total of 20 extra weeks. Benefit checks average about $300 a week nationwide.

That's on top of a 13-week extension approved by Congress last June. Jobless benefits, which are jointly administered by the states and federal government, normally last up to 26 weeks.

Without the legislation, its proponents say, 1.1 million people will have exhausted their unemployment insurance by the end of the year.

The New York-based Conference Board, meantime, said its monthly forecast of economic activity declined 0.8 percent in October, worse than the 0.6 percent drop analysts had expected.

The economy's health worsened last month as stocks, building permits and consumer expectations all sank, the private research group said. Over the past seven months, the index fell at a 4.7 percent annual rate, faster than any decline since 2001.

Riccadonna said Deutsche Bank now projects that the economy will suffer a net reduction of about 425,000 jobs this month, up sharply from a previous estimate of 325,000. That would boost the unemployment rate to 6.8 percent, from October's 6.5 percent.

Joshua Shapiro, chief U.S. economist for MFR Inc., expects companies to cut a net total of 400,000 jobs in November. The Labor Department said Nov. 7 that the number of unemployed workers reached 10.1 million last month, a 25-year high.

The economy has slowed sharply in recent months because of the housing slump and the broader financial crisis, which have led consumers and businesses to cut back on spending.

Higher unemployment is expected to further fuel the downward spiral, as laid-off workers are more likely to fall behind on mortgage payments and other debt.

"What worries us is that this will lead to higher defaults on credit cards" and other debt payments, said Arpitha Bykere, an economic analyst at RGE Monitor. That would trigger further losses in the ailing banking sector.

Bykere said RGE Monitor, a consulting firm chaired by economist Nouriel Roubini, forecasts that unemployment will peak at 8.5 percent by the end of 2009. Last year, the rate averaged 4.6 percent.

Layoffs have begun to spread from hard-hit sectors such as construction and financial services to industries such as hotels and travel, which early this year were bolstered by foreign visitors to the United States taking advantage of the weak dollar. The leisure and hospitality industry has lost 75,000 jobs since June, according to Labor Department data.

Casinos in Nevada and Missouri announced layoffs last week. And Colonial Williamsburg said this month it has cut 140 jobs.

Another sign that layoffs will likely worsen: Companies cut 33,600 temporary workers last month. That's usually a sign of more layoffs to come because companies tend to cut those jobs first, said David Wyss, chief economist for Standard & Poor's.

Economists consider jobless claims a timely, if volatile, sign of how fast companies are laying off workers. Employees who quit or are fired for cause are not eligible for benefits.

Companies from a wide range of sectors have announced layoffs recently, including Citigroup Inc., Union Pacific Corp., Boeing Co., Wyeth, Sun Microsystems Inc. and poultry maker Pilgrim's Pride Corp.