Weak Jobs Data
Boost Likelihood of a Rate Cut

Housing Slump Dents Builders, Manufacturers; Dow Drops 250 Points 

SUDEEP REDDY, TIMOTHY AEPPEL and GREG IP
Wall Street Journal 8sep2007

The first employment drop in four years suggests damage from the severe housing slump is beginning to ripple through the U.S. economy, and makes it all but certain the Federal Reserve will cut interest rates this month to try to avert a sharp slowdown.

The surprise disappearance of 4,000 nonfarm jobs in August — economists had expected 100,000 would be created, based on data such as jobless claims and private-sector job estimates — was driven by losses in construction and manufacturing, the Labor Department said.

The jobs report stoked fears of recession, sending shockwaves through financial markets as investors scrambled to sell stocks and buy longterm government securities as a safe haven. The Dow Jones Industrial Average tumbled 249.97 points, or 1.9%, to 13113.38.

Adding to concerns: Employment numbers for June and July were revised sharply downward. That means the job market was weakening even before financial turmoil erupted last month as long-festering concerns about rising delinquencies on riskier loans known as subprime mortgages suddenly spread to other markets. Moreover, some analysts said the jobs picture is likely to darken further; yesterday's report covered employment activity only through mid-August, so it doesn't include subsequent job losses in the mortgage-financing industry.

Indeed, Countrywide Financial Corp., one of the nation's largest mortgage lenders, on Friday said it plans to cut as many as 12,000 jobs — which would be about a fifth of its work force. The company has been forced to slash its lending and is expected to report a loss for the current quarter largely because it is no longer able to sell many types of loans now deemed too risky by investors, who gobbled up such loans until recently. And IndyMac Bancorp Inc., another big home-mortgage lender, said it plans to eliminate about 10% of its 10,000-member work force over coming months.

The weak report raised immediate questions about the fate of consumer spending, which has held up over the past year despite a slowing economy largely because of a strong job market. The August figures represent "an ongoing weakening that became decidedly worse with the financial turbulence," said Bank of America economist Peter Kretzmer. "This is likely to signal a point at which consumer spending doesn't have the kind of resilience it had earlier."

Harley-Davidson Inc., the iconic motorcycle maker based in Milwaukee, announced yesterday that it is lowering its third-quarter shipments to between 86,000 and 88,000 units from a previous projection of 91,000 to 95,000 units due to slumping domestic demand. The company's stock price fell more than 9% Friday.

The nation's unemployment rate remained at a historically low 4.6% in August. Analysts said that some parts of the report appeared fluky and that the job market may not be as weak as it suggests. For example, public-school employment fell sharply for the second-straight month. That might reflect problems making seasonal adjustments for teachers' summer break, which could start or end outside of a particular month's survey period.

Moreover, other economic reports are more upbeat: In recent days, there have been several indications that the credit crisis isn't spreading to the wider economy. A survey by the Institute for Supply Management indicated manufacturing continued to expand last month, for example, and both retail sales and auto sales have been stronger than expected.

To Wall Street, a softening job market is an especially troublesome sign. During good times, strong employment encourages consumption of goods and services, which supports corporate profits, making the profitable companies' shares more attractive to buy. Any weakness in that chain can become a powerful reason to sell stocks.

The jobs report appears to seal the case for the Fed to cut short-term interest rates when policy makers meet Sept. 18, but the size of any such cut remains up in the air.

On Friday, futures markets were expecting at least a quarter-percentage-point cut, from the current federal-funds target rate of 5.25%, and a high probability of a half-point cut.

Larry Meyer, vice-chairman of forecasting firm Macroeconomic Advisers LLC, noted that prior to the jobs report, "it's not clear everyone [at the Fed] was on board" with any cut. On Thursday, Federal Reserve Bank of Dallas President Richard Fisher told reporters a rate cut "is a judgment call, and that judgment is still being formed."

Friday's data are likely to mute many objections to some sort of cut. Combined with weak pending home-sales data for July, the jobs data suggest the economy had notably less momentum than Fed officials had thought even before August's markets turmoil.

But the Fed faces a tough choice deciding what size. Favoring a quarter point cut is the fact that the Fed prefers to move gradually so as to assess the results of early moves and to gather new information before moving again. It would also assuage concerns by some Fed officials, principally reserve-bank presidents, about encouraging further speculative behavior in the future, compromising the Fed's inflation-fighting credibility. Moreover, the anecdotal information is more upbeat than the jobs data. That contrasts with early 2001, when the anecdotes were more "foreboding," recalls Mr. Meyer, a Fed governor at the time.

On the other hand, a situation in which the risks to economic growth have suddenly intensified and the potential spillover damage of slumping housing is more uncertain than ever argues in favor of a half-percentage point cut. As for the risk of appearing to bail out investors, Fed Chairman Ben Bernanke, while acknowleding that concern in a speech a week ago, indicated it would be secondary to the Fed's principal mission of basing interest rates on inflation and the economic outlook.

Fed officials had expected some of the employment declines. Construction-related employment had fallen only modestly in recent months despite significant reductions in homebuilding. In manufacturing, the bulk of the job losses were concentrated in sectors linked to residential construction — such as furniture and construction machines — as well as the domestic auto industry.

"There are just not a lot of capital projects out there, so we have to spend a lot of time looking at international markets to try to find work," says Kim Beck, chief executive of Automatic Feed Co., a machinery maker in Napoleon, Ohio. Automatic Feed makes presses used to stamp metal into fenders and other shapes on auto-assembly lines. And there are very few new lines being built in the U.S. Mr. Beck's work force is down to about 80 employees from a high of 150 a few years ago, as the company has steadily shed workers.

Some manufacturing sectors continue to boom, such as those that produce equipment for oil-and-gas exploration and some high-tech items. Wayne Fortun, CEO of Hutchinson Technology Inc., a maker of suspension devices for computer disk drives, laid off 10% of his work force in June, or about 500 people. Since then, he says, business has accelerated steadily, and the company has had to press its remaining employees to do lengthy overtime.

The overall economy picked up strongly in the second quarter after almost stalling early in the year. Now, economists expect a growth rate of about 2% through the rest of the year before it slows further in the first half of next year.

For now, economists generally don't think the economy will slip into recession, usually defined as two consecutive quarters of shrinking output, accompanied by rising unemployment and shrinking profits. But most believe the odds of one have risen.

On only five occasions since 1985 has payroll employment shown a monthly decline outside of a recession period, said Zoltan Pozsar, an economist at Moody's Economy.com Inc. Each of those was followed by a monthly gain averaging 360,000 jobs. That suggests businesses "seem to hire with a vengeance" after these midcycle slowdowns, Mr. Pozsar said. "A loud and clear and simple signal from the Fed" could help bring such a hiring surge about, he added.

Economists said additional layoffs are likely to depress payrolls and push the unemployment rate higher in coming months. The subprime-mortgage market's meltdown led to at least 25,000 job cuts at mortgage-finance firms last month, half of which came after the Labor Department's survey period ended. Moreover, the housing sector's troubles are far from over: Home sales were already tumbling even before last month's credit crunch froze some buyers out of the market and raised mortgage rates. Falling home prices will add to the risk of lower household wealth depressing consumer spending.

—Conor Dougherty, Peter A. McKay and Michael Hudson contributed to this article.

source: p.A1 7sep2007

Countrywide Is to Cut 20% Of Work Force

Drop in Mortgage Loans Will Affect up to 12,000 In Next Three Months

JAMES R. HAGERTY / Wall Street Journal 8sep2007

Countrywide Financial Corp., cutting costs in the face of a severe drop in home-mortgage lending, said it expects to reduce its work force by as much as 12,000 jobs, or about 20%, in the next three months.

The move Friday, on a day when investors were already nervous about jobs, was the latest step in a struggle by the largest U.S. home-mortgage lender in terms of loan volume to cope with rising defaults, falling house prices and the flight of investors from the market for many types of mortgages now deemed too risky.

Countrywide said it expects the current turmoil to reduce its mortgage lending next year by 25% from this year's level. In a letter to employees, the Calabasas, Calif., company's Chief Executive Officer Angelo Mozilo called the current down cycle in mortgages "the most severe in the contemporary history of our industry."

One benefit is that interest rates have risen steeply on many types of loans, providing better yields "than we have seen for years," Mr. Mozilo said. But Countrywide also is having to offer higher interest rates to attract deposits for its savings bank.

Meanwhile, IndyMac Bancorp Inc., the nation's ninth-largest home lender, said it will cut about 10% of its work force of around 10,000 in the next few months. It also said that it plans to halve its quarterly dividend, and that it may post a loss of as much as $36.8 million for the third quarter.

But CEO Michael Perry said the Pasadena, Calif., savings and loan should be "solidly profitable" in the fourth quarter and in 2008. "We do anticipate that this quarter will represent the trough for our earnings during this current down cycle," Mr. Perry said in a letter to shareholders.

In August, Countrywide sought to shore up its finances by selling $2 billion of preferred convertible shares to Bank of America Corp., giving that bank the option to convert the preferred into a stake of about 16% in Countrywide's common stock. Countrywide also borrowed $11.5 billion through a line of credit from 40 banks, replacing short-term, commercial-paper funding no longer available from nervous investors.

Bank of America spokesman Scott Silvestri declined to comment on whether the bank played a role in Countrywide's decision to make the job cuts. "We have a passive investment in the company," he said.

Because investors are balking at buying loans, Countrywide and other lenders are stuck with some loans that have rapidly lost value. Countrywide is expected to mark down the value of many of those loans when it reports third-quarter earnings next month, while increasing provisions for losses on defaults and foreclosures.

Frederick Cannon, an analyst at Keefe, Bruyette & Woods, said the market turmoil makes it hard to estimate results, but he forecasts that Countrywide will report a loss of $582 million, or 99 cents a share, for the third quarter.

Countrywide said it expects to reduce its work force by 10,000 to 12,000 jobs, including about 1,400 job cuts recently announced. The company is retrenching to focus on relatively conservative loans that it can hold as long-term investments in its savings-bank unit or sell to government-backed investors Fannie Mae or Freddie Mac. Countrywide also will aim to make loans that can be insured by the Federal Housing Administration. The job cuts may be smaller if the market improves, company officials say.

Countrywide said some of the job cuts would be in its "wholesale" division, which deals with loans originated by mortgage brokers.

Countrywide and other big lenders have been putting more emphasis on their direct lending through branches, Web sites and call centers, and reducing their reliance on brokers, who handled the bulk of all loans during the mortgage industry's boom of 2003 through 2005.

Countrywide also is cutting back on its "correspondent" unit, which buys loans made by smaller lenders.

But Countrywide has been hiring more loan officers for its "retail" lending operations, which count on close ties with local real-estate agents and builders to bring in customers. This operation hired nearly 1,000 sales people in August, the company said, largely from rivals forced out of business.

Countrywide's strategy is to rely on its savings bank to provide funding for lending. That funding comes from deposits, as well as borrowings from the Federal Home Loan Bank system. The goal is to end reliance on short-term borrowings from jittery Wall Street firms and other creditors.

As for IndyMac, the company in recent weeks has slashed lending and forecast that its mortgage-loan production in the fourth quarter will be $12.8 billion, less than half the $26 billion of a year earlier. Like Countrywide, the company now is focusing on loans that can be sold to Fannie Mae and Freddie Mac. Such loans should account for 85% of the company's total in the fourth quarter, up from 19% for 2006 as a whole.

—Kevin Kingsbury contributed to this article.

source: 7sep2007