Unemployment May Rise, Manufacturing Slow: U.S. Economy Preview

Dec. 2 (Bloomberg) -- Employers in the U.S. hired fewer workers in November and the unemployment rate rose to a 16-month high, reflecting a loss of confidence in the economic expansion, economists said before a report this week.

The economy created 75,000 jobs, less than half October's 166,000 gain, according to the median forecast in a Bloomberg News survey of economists before the Labor Department's Dec. 7 report. The jobless rate rose to 4.8 percent from 4.7 percent, based on the survey.

Companies are curbing expenses as the economy is forecast to nearly stall this quarter under the weight of the worsening housing slump. Federal Reserve Chairman Ben S. Bernanke last week said consumers face ``headwinds,'' and the labor market was ``important'' for sustaining growth.

``The labor market is adding to the list of reasons the consumer is in trouble,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``If employment growth is weakening, then so will spending.''

There is already evidence Americans are scaling back.

Consumer spending rose less than forecast in October and incomes increased at the slowest pace in six months, figures last week from the Commerce Department showed. Spending stalled when adjusted for inflation, the figure used in calculating economic growth.

Auto sales in November were probably the third weakest of the year, according to analysts surveyed by Bloomberg News. General Motors Corp., Ford Motor Co. and Chrysler LLC probably all posted declines compared with November 2006. Automakers will release November results tomorrow.

Manufacturing Slows

Also tomorrow, the Institute for Supply Management may report manufacturing expanded in November at the slowest pace in 10 months, adding to evidence the housing slump and rising energy costs are reverberating though the economy.

The Tempe, Arizona-based group's factory index probably fell to 50.7 from 50.9 in October, according to the survey median. A reading of 50 is the dividing line between expansion and contraction.

A report on Dec. 5 from the Commerce Department may show factory orders were unchanged in October after a 0.2 percent gain in September, the Bloomberg survey showed.

Service industries have so far fared better than manufacturers this quarter, economists said.

Services Little Changed

A separate report from the Institute for Supply Management due Dec. 5 may show banks, builders, retailers and other non- manufacturers expanded last month at about the same pace as in October. The gauge fell to 55 from 55.8, based on the median of economists' forecasts.

Energy prices, the weakening labor market and the persistent housing slump raise the odds that retailers and other service providers will soon feel the brunt of the economic slowdown, economists said.

Bear Stearns Cos., the biggest underwriter of U.S. mortgage bonds, said last week it will eliminate 650 jobs in the firm's fourth round of cuts this year.

Citigroup Inc., the largest U.S. bank, said it is reviewing ways to cut expenses as it seeks a new chief executive officer and grapples with mortgage writedowns. Former CEO Charles O. ``Chuck'' Prince III, who was forced to resign last month, had pledged to eliminate 17,000 jobs and trim costs by $4.6 billion.

Fed policy makers have signaled mounting concern over the outlook.

Consumer `Headwinds'

``The combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead,'' Bernanke said in a Nov. 29 speech.

Federal funds futures show traders see a 100 percent chance of a reduction in the benchmark rate this month, with a 40 percent probability of a half-point move. The Fed has cut rates by 0.75 percentage point over the past two meetings.

Policy makers said Nov. 20 that they expect U.S. gross domestic product to increase between 1.8 percent and 2.5 percent in 2008, ``notably below'' the 2.5 percent to 2.75 percent they predicted in July.

In other reports this week, a Labor Department report on Dec. 5 may show worker productivity in the third quarter rose, while labor costs fell. Two days later, a preliminary estimate from the University of Michigan may show consumer sentiment fell to a two-year low in December.

Bloomberg Survey

Date Time Period Indicator BN Survey Prior
12/03 10:00 Nov. ISM Manufacturing 50.7 50.9
12/03 10:00 Nov. ISM Prices 65.5 63.0
12/05 8:30 3Q F Productivity 5.7% 4.9%
12/05 8:30 3Q F Unit Labor Costs -1.0% -0.2%
12/05 10:00 Oct. Factory Orders 0.0% 0.2%
12/05 10:00 Nov. ISM Non-Manufacturing 55.0 55.8
12/06 8:30 11/17 Continuing Claims 2603K 2553K
12/06 8:30 11/24 Initial Jobless Claims 335K 329K
12/07 8:30 Nov. Avg. Hourly Earnings 0.3% 0.2%
12/07 8:30 Nov. Change Nonfarm Jobs 75K 166K
12/07 8:30 Nov. Unemployment Rate 4.8% 4.7%
12/07 10:00 Dec. P Confidence- U. of MI 75.0 76.1
12/07 15:00 Oct. Consumer Credit $5.5B $3.7B

To contact the reporter on this story: Joe Richter in Washington Jrichter1@bloomberg.net .

Bill introduced by Chris Dodd

The chairman of the Senate Banking Committee would forbid commercial companies from opening their own banks, known as industrial loan corporations.

A bill introduced today by Sen. Christopher Dodd (D-Conn.) would severely curtail which companies can apply for ILC charters and specifically forbid commercial companies such as Wal-Mart from owning an ILC.

It seems that only large institutions would be able to apply for an ILC, as well, under the bill, as only companies subject to consolidated supervision by the Federal Reserve and the Securities and Exchange Commission would be permitted to own an ILC. Applications approved before October 2007 would be allowed.

The Federal Deposit Insurance Corporation would be the primary regulator overseeing ILCs, and would be granted enforcement and examination authority over ILCs, as well as the ability to set capital reserve requirements. Such authority would be modeled on the Federal Reserve’s jurisdiction over bank holding companies.

At last count there were 59 ILCs operating in six states, though most are based in Utah and California. Although the FDIC has fielded ILC applications for years, the issue became controversial after Wal-Mart applied for an ILC in 2005. In 2006 the FDIC extended its moratorium on new ILC applications from non-financial companies, which is set to expire at the end of January. It’s expected the FDIC will not renew it.

A similar but ultimately less restrictive bill in the House would require ILCs owned by companies with at least 15% of gross revenues from non-financial activity to register with the Federal Deposit Insurance Corp. That bill is currently in the banking committee.

The Senate bill, however, considers a company to be “commercial” if it engages in any act that is not financial in nature. That means ILCs owned by retail outlets and perhaps insurance companies would be restricted under the bill. Vehicle manufacturers would be exempted from this, leaving the door open for new ILCs at organizations such as GMAC.

In September, the FDIC approved an application by health insurer WellPoint, deeming the company to be a financial institution.

At a hearing in October, Democratic senators on Mr. Dodd’s committee said they would support increasing federal oversight of ILCs and would favor the SEC taking the lead regulatory role. While the SEC has remained silent on the issue, Erik Sirri, director of the agency’s division of trading and markets, testified during the hearing that any legislative changes should not duplicate existing regulations.

Sen. Robert Bennett (R-Utah) has been one of the most strident opponents of curbing ILC applications, saying there has been no crisis resulting from ILC ownership by commercial companies. Utah is home to 33 ILCs.