U.S. Economy: Unemployment Rate Reaches 25-Year High (Update1)

April 3 (Bloomberg) -- The U.S. unemployment rate jumped in March to the highest level since 1983 and service industries shrank at a faster pace, indicating the economy remains trapped in what’s likely to be the longest recession since the 1930s.

Federal Reserve Vice Chairman Donald Kohn said both the Obama administration and central bank must remain “flexible and open” to further measures because the economy and financial markets aren’t “out of the woods yet.” The labor-market rout will make it tougher for President Barack Obama to follow through on his pledge to save or create 3.5 million jobs.

The economy lost 663,000 jobs in March, bringing losses since the slump began to about 5.1 million, the worst in the postwar era, Labor Department figures showed in Washington. The 8.5 percent jobless rate was consistent with the forecasts of 79 economists surveyed by Bloomberg News. The Institute of Supply Management’s non-manufacturing index unexpectedly dropped.

“We could continue to see a few more months of really bad employment numbers before it starts to ease,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. Behravesh projected the jobless rate will peak between 10 percent and 10.5 percent in early 2010. “We aren’t there yet, but we are getting closer to a bottom,” he said.

Treasuries, Stocks

Treasuries slumped after the jobs report was no worse than what economists had forecast, with benchmark 10-year note yields rising to 2.89 percent at 4:19 p.m. in New York, from 2.77 percent late yesterday. The Standard & Poor’s 500 Stock Index reversed declines to close up 1 percent at 842.5.

Job cuts have been spreading from manufacturers such as Johnson Controls Inc. and Dana Holding Corp. to service providers like International Business Machines Corp. and even the U.S. Postal Service.

In addition to cutting jobs, companies also reduced hours for those still on payrolls. The average number of hours worked fell to 33.2 per week, down six minutes from February and the fewest since records began in 1964.

Revisions subtracted 86,000 workers from January payrolls while February’s drop of 651,000 was not revised.

The last time the unemployment rate was at 8.5 percent was in November 1983, when the economy was recovering from the 1981- 82 recession that pushed the rate to almost 11 percent. Then Fed Chairman Paul Volcker boosted interest rates to quell soaring inflation following the 1970s fuel crisis.

Payroll Forecast

Payrolls were forecast to drop by 660,000, according to the median of 80 economists surveyed by Bloomberg News. Estimates ranged from losses of 525,000 to 750,000. Forecasts for the jobless rate ranged from 8.2 percent to 8.7 percent.

“The hope and expectation is that things will get a little less dire in the second quarter as various stimulus efforts kick in,” said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York, who used to work at the Fed.

Today’s report showed factory payrolls fell by 161,000 after declining 169,000 in the prior month. Economists forecast a drop of 160,000. The decrease included a loss of 17,500 jobs in auto manufacturing and parts industries.

The manufacturing slump that began more than a year ago may intensify should General Motors Corp. be forced into bankruptcy, economists said. As many as 1 million additional auto-industry jobs may be lost and unemployment would climb to 11 percent, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York.

Auto Slump

The auto slump has already rippled through the industry. Johnson Controls, a maker of car interiors and batteries, said last month it will shut 10 factories and cut about 4,000 jobs. Dana, the truck-axle manufacturer that exited bankruptcy in 2008, said it will boost its payroll reduction to 5,800 this year, 800 more than previously announced.

“We are taking the difficult actions necessary to survive,” Dana’s Chief Executive Officer John Devine said in a March 16 statement.

Service industries, which include banks, insurance companies, restaurants and retailers, cut 358,000 workers after a 366,000 decline in February. Financial firms cut payrolls by 43,000, after a 44,000 decrease the prior month. Retail payrolls decreased by 47,800 after a 50,800 drop.

The ISM’s services index, which covers almost 90 percent of the economy, fell to 40.8, the lowest level of the year, from 41.6 the prior month, according to the Tempe, Arizona-based group. Readings below 50 signal contraction.

The measure was projected to increase to 42, according to the median forecast in a Bloomberg News survey of 67 economists. Estimates ranged from 38 to 45.

Fewer Orders

The ISM index of new orders fell to 38.8 from 40.7 the prior month, and its gauge of employment dropped to 32.3 from 37.3.

For many Americans, this employment slump has been an unfamiliar experience. Sarah Opple, 42, was fired in February from a sales position at Gaylord Hotels in Chicago after holding a series of jobs in the hospitality industry since she was 17 years old. “It’s more real to me now,” she said in a March 26 interview. “This recession is way more tangible than the others. It makes everyone feel they could be next.”

Since taking office Jan. 20, Obama has enacted a series of measures aimed at stemming the recession. He signed into law a $787 billion stimulus plan on Feb. 17 that included spending on infrastructure projects to boost hiring.

The Treasury Department is also moving to repair the damaged financial system and lower record foreclosures, while the Fed is flooding markets with cash to boost borrowing and spending.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net