Thursday, August 7, 2008

Unemployment Spikes, Fed Keeps Interest Rate Level

by Amy Lillard

Initial claims for state unemployment benefits rose to 455,000 last week, according to reports released by the Labor Department. The new figures represent a jump of 7,000 from previous reports, and the highest rate in six years. Overall, the unemployment rate hit 5.7 percent in July, with some analysts predicting the rate to peak next year at well over 6 percent.

Payrolls declined by 51,000 workers in July, the seventh straight monthly drop. Additional figures for unemployment claims, the moving four-week average, posted a jump over the 400,000 mark, the highest since July 2003 and bypassing the threshold for recession.

The Labor Department did cite increased access of benefits, the result of a new federal program, as a partial cause of the increase. But the rising unemployment is also a result of the slowing economy; companies are cutting costs and reducing staff as demand slows and raw material costs spike.

Rising unemployment also increases worry that consumer spending will decline in the coming months. For the last few months spending has been secure on the basis of economic stimulus checks. Now that these are spent, spending will probably decrease as costs rise, jobs are cut, and the economy continues to falter.

With the economy is dragging and labor markets softening, the Fed decided to halt its pattern of interest rate cuts and stay firm at its recent meeting. The Federal Reserve kept the benchmark interest rate at 2 percent, suggesting that weak employment and general financial instability will keep naturally keep borrowing costs low.

After an aggressive series of rate cuts, the most in two decades, the Fed halted the cuts at their last meeting in June, and has continued to do so. Experts contend the Fed will leave the rate unchanged in coming months in efforts to slow inflation and balance economic turmoil.

A rise in the pending home sales index, based in contracts signed in June, was a surprising but welcome piece of news in the midst of the unemployment and economic crises. The 5.3 rise brought the index to 89.0, the highest since October. Some analysts note this could mean a stabilization of sales and a flattening in the market. Others note it could be a rise from increased sales of foreclosed homes.

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