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The dramatic change in the unemployment rate became the final factor to indicate that the nation's economy is entering a recession, according to commentary and analysis from leading business-to-business accounts receivable insurer Euler Hermes ACI.
"We are now virtually on the verge of a recession,” Euler Hermes ACI chief economist Dan North said on January 10. "The signs of a recession and forces for a recession have been around for quite some time, and the employment figures have provided the final indicator.”
North had been forecasting a "sharp slowdown” for the economy since March 2007 based upon several economic headwinds: the Federal Reserve's tightening of monetary policy from 2004 to 2006, the spike in energy prices, and the burst asset bubble of the U.S. housing market. Despite these factors, North said that the employment situation had been masking the true state of the economy. "The last thing to go is employment – everyone feels good about the economy when everyone has a job,” he explained. "However, last Friday's report showing a sharp increase in the unemployment rate and very weak job creation indicates that we are now on the brink of a recession.”
While the 5.0 percent unemployment rate is still relatively low historically, North said the dramatic change in the number is what is important. "The unemployment rate rose 0.3 percent in one month,” he said. "Every recession we have had since the 1970s has been accompanied by an increase in unemployment of that size.”
Once the employment picture turns negative, which he forecasts it will this quarter, North said it is too late for the Federal Reserve to enact any meaningful policy changes to keep the economy from sliding into recession. However, he believes the Fed will keep cutting interest rates "perhaps down to 3.0 percent,” which will aid the nation's economic recovery either later this year or early next year. "Fed actions take at least a year to work, so the interest rate cuts that started in September 2007 will help us by the fourth quarter of 2008 or the first quarter of 2009,” he said.
Euler Hermes ACI is North America's oldest and largest provider of trade credit insurance and accounts receivable management solutions and is the