Another important part of the economy is now starting to falter: businesses that cater to consumers.
As families stop making so many trips to the mall or cut back on their dining in restaurants, the consumer sector is now laying off workers. Jobs are disappearing for people in furniture stores, electronics retailers, and department stores. Even food-services companies are reducing their staffs.
“This is the first consumer-led recession we have had since 1990-1991,” says Dan Meckstroth, chief economist at Manufacturers Alliance/MAPI in Arlington, Va. “Consumers are overleveraged and it’s going to take some time for this to unwind.”
On Friday morning, Americans got their bleakest view yet of the problems in the consumer sector: The Department of Labor reported that the US lost 159,000 jobs in September, the most since March 2003. The nation’s headline unemployment rate stayed at 6.1 percent but would have been higher if more people had not dropped out of the labor force. Losses in the retail sector amounted to 40,000 jobs, the second largest loss next to construction.
The problems in the consumer sector point to more economic trouble ahead, say some labor-market specialists.
“It suggests a tapped-out consumer and that could have serious repercussions for a poor holiday season,” says John Challenger of Challenger Gray & Christmas, a Chicago outplacement firm.
Over the next two quarters, consumers will cut back spending by more than a 2 percent annual rate, predicted Scott Anderson, senior economist at Wells Fargo Banks in Minneapolis, on Friday. This would help to drive the economy into a recession that won’t end until the spring of next year, he wrote.
Part of the consumer economy’s problem is the drying up of funds. Most consumers have either spent the checks sent out by Congress this spring or used them to pay down debt. Now they are getting caught up in the credit-market crisis, says Bill Hardekopf of LowCards.com, a consumer website.
“Credit markets seem to be dropping for a significant number of customers, especially those with riskier credit,” he says. In addition, he has noticed that credit card companies seem to be reclassifying their customers downward. An individual considered to be an excellent credit risk may be downgraded into a "good" category.
“So instead of getting the 8.99 percent rate that was advertised, instead they get the 10.99 percent rate,” he says.
Retail workers often come from the lower-income echelons. Unemployment in this sector is rising, says Andrew Stettner, deputy director of the National Employment Law Project in New York. “When you look at the numbers ... there has been a big increase in unemployment for people of color and less education,” says Mr. Stettner. “This is hitting the lower end of the social spectrum.”
But Stettner is also alarmed over the rising number of people – some 2 million – who have been out of work for more than six months. He says this has not happened in five years.
“Some 21 percent of the unemployed have been out for more than six months,” says Stettner. “When it’s over 20 percent that means hiring is very slow. People can’t find jobs.”
But it’s not totally bleak. Roy Krause, president of Spherion, a staffing and recruiting firm based in Fort Lauderdale, Fla. For the past 18 months, temp hiring has been dropping each month. However, he notes that in September temp hiring was down 9 percent compared with September of last year. The 9 percent drop was the same as August. “The good news is that it was not getting any worse,” he says.
Part of the problem in the job market is the economic uncertainty. A $700 billion bank rescue plan from Congress can remove some of that uncertainty, Mr. Krause says. The announcement by Well Fargo that it will acquire Wachovia without any government aid – topping Citigroup’s bid – may also be a positive for the financial markets.
“It shows business at the right price will look at [mergers] and expansion,” says Krause.