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Weak jobs reports set off another confidence crisis
January 16, 2008

The unexpectedly small 18,000 job gain in December threatens to destabilize the fragile financial market yet again and push buyer confidence even lower. By itself, one weak month of job growth is usually not so significant. But investors and business managers had been trying to conduct “business as normal”, hoping for no more bad news. Now it has happened.

The consequences for construction are another round of turmoil in mortgage markets which disrupt and delay construction starts and another round of cuts in space and facility demand as homebuyers, facility managers and developers cautiously scale back to avoid being caught overextended.

The Federal Reserve Board and other central banks will need to inject more cash into the banking system; the flip side of this coin is another drop in interest rates for risk free government bonds. The cash is needed to offset to offset an expected rise in cash hoarding by lenders now more fearful than their customers’ ability to repay them has been further weakened. Some developers and other businesses will have to pay substantially more for normal operating loans, resulting in some defaults and accompanying layoffs.

The economic news will be grim in the first half of 2008. Export and service industries are still growing fast enough to keep overall economic growth positive. But world economic growth, while still strong, is now ebbing, especially in Europe and Japan. And service industries can only keep growing for another 3-5 months before the decline elsewhere in the economy brings their expansion to a halt.

We need some good news on energy, metal or food prices or marked improvement in financial transparency that lets lenders again trust that borrowers will be able to repay them. Otherwise, the economy will sink into a recession.

Posted by Jim Haughey on January 16, 2008 | Comments (2)