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The unemployment avalanche gathered momentum in January as the U.S. economy lost 598,000 jobs, the government reported on Feb. 6—and once again the losses were heaviest in the goods-producing sector. Education, health care, and government actually added jobs in defiance of the worst economic downturn since the 1970s.
For workers who make, distribute, and sell stuff—rather than provide services—the news was unrelentingly bad. Manufacturing lost 207,000 jobs in January for its worst performance since 1982. Employment also fell by 45,000 in retailing and 111,000 in construction. Over the past year construction job declines are the highest since 1943, according to economist John Silvia of Wachovia.
"The only 'positive' of today's report is that these ugly numbers put even more pressure on policymakers to finally agree on fiscal measures to stop the downward spiral of the economy," wrote UniCredit economist Harm Bandholz in an instant analysis of the numbers.
The loss of jobs in January nearly exceeded the blowout loss of 602,000 jobs in December 1974. Economists surveyed by Bloomberg had expected a loss of about 524,000 jobs, according to the median estimate. The January unemployment rate rose to 7.6%, the highest since 1992, from 7.2% in December.
Total job losses in the 12 months through January were 3.5 million, which was the most on record going back to 1939—although the comparison is a bit misleading since total employment has grown significantly over the period. As in previous months, it was the goods-producing side of the economy that got hit worst. (See "What Falling Prices Are Telling Us" for a closer look at the discrepancy between the goods and service sectors.)
Merrill Lynch economist Sheryl King, in a Feb. 4 report, wrote that businesses have been "sideswiped" by a slowdown of demand in the U.S. and abroad. Manufacturers didn't react quickly enough to the slump and have gotten stuck with lots of unsold goods and unneeded raw materials. In recent months inventories have surged at the fastest pace in proportion to sales since the recessions of the mid-1970s and early 1980s, King wrote. Now, companies are belatedly cutting production to work off some of those inventories, which means they don't need as many workers. In manufacturing, "the surge in inventories suggests to us there will be further deep production cuts in the coming months," King said.
But it's not just factories that have bloated inventories. So do middlemen and retailers. Among the wholesale sectors with an overabundance of inventories are autos, lumber, plumbing, and electrical products. At the retail level, it's autos (again), along with building materials, clothing, furniture, and electronics. Inventories are better under control in the food and beverage sector, at least so far.
The silver lining of the inventory correction is that eventually companies run down their supplies so far that they need to crank up production to replace them. Merrill Lynch expects that to start happening in the second half of 2009.
Coy is BusinessWeek's Economics editor.