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American Recession Nears Crucial Point

With the U.S. reeling from a recoiling housing market and icy credit markets, Wall Street warily awaits what could be a definitive nail in the economy's cross come Friday.

The Bureau of Labor Statistics delivered its official labor report on December 5th as the economy lost 553,000 jobs in November, effectively increasing the unemployment rate to 6.7%. Bloomberg reports the consensus was for a 300,000 decline in nonfarm jobs. The November tally was the largest decline in payrolls since 1975 while the unemployment rate represents a 15-year high.

On December 4th, the Labor Department reported workers filing initial unemployment claims dropped to a one-month low, down 21,000 to a seasonally adjusted 509,000 for the week ended November 29th. Yet the four-week moving average, which smoothes volatility in the claims number, increased by 6,250 to 524,500, representing the highest rate since 1996.

When coupled with Friday's Labor Report and the weekly claims report, several other forecasts are depicting a bad moon rising on the labor front. On December 3rd, the Challenger job-cut report stated there were 181,671 announced layoffs in November. The highly fickle ADP Nonfarm Private Payroll Employment index projected a 250,000 month-over-month decline in jobs for November.

Looking at a firm-by-firm basis, the wave of blue chip firms announcing job cuts continued for the week ended December 5th. On Thursday, AT&T (T) reports it will reduce its workforce by 12,000, representing 4% of its workforce. Fellow Dow component DuPont Co (DD) will slash 6,500 employees (2,500 salaried positions and 4,000 contractors).

Downsizing was not limited to the blue chips. Credit Suisse (CS) will cut its workforce by 11%, representing about 5,300 jobs, after posting a $2.5 billion loss over the first two months of the fourth quarter. Nomura Holdings (NMR) will slash 1,000 employees at its London offices in the wake of the purchase of Lehman Brothers’ equities and investment banking units. Signal-transmission solutions provider Belden (BDC) reports it will cut 1,800 jobs, or 20% of its employees. Media giant Viacom (VIA) will eliminate 850 positions in Q4, or 7% of its work force. Adobe (ADBE) announced a 600 job cut after the software developer guided lower for Q1 sales outlook.

Companies are cutting their headcount at a rapid pace as declining consumer spending is expected to cut into profit margins over the next several quarters. The tentacle-like effect of a softening labor market and its wide-reaching effects are cause for significant concern along the lines of escalating systemic risk the Treasury and Federal Reserve are battling. Rising unemployment has the added mal-effects of cutting into real output while placing downward pressure on wages.

The labor market is, by far, the most impactful data point triggering changes in trading patterns. The Friday issue-date of the report sparks intense interest amongst the trading public, usually setting the general trend of trading for the short-term.

Yet despite the alarming rate at which unemployment has risen unabated of late, consumer sentiment has improved marginally over the past few months, mostly thanks to declining energy prices. Decreasing demand for petroleum, due to slowing growth worldwide, has been one positive fallout effect of a softening labor market. While Friday's Labor Report could bring ill tidings for the U.S. economy, prices at the pump will offer one beacon of hope. Whether those who have or could lose their jobs in the coming months maintain their optimism remains to be seen.

- By Matt Cavallaro, BetterTrades Financial Writer