Housing slump weighs on April job growth

With U.S. manufacturing still in decline, prospects for future job growth depend heavily on the U.S. consumer continuing to spend. The latest data show spending holding up, but barely. In March, consumer spending edged higher but posted its weakest gain in five months in part because higher gasoline prices put a crimp in household budgets.

The slowdown in wages reported in Friday’s employment report could further dampen spending. Average hourly earnings rose to $17.25 in April, a 0.2 percent increase from March. Economists were expecting a modest 0.3 percent rise. Over the past 12 months, wages grew by 3.7 percent, the slowest annual increase in a year.

Household budgets are already showing other, long-term signs of stress, according to Brian Fabbri, chief economist with BNP Paribas.

“We’ve never seen this much increase in debt relative to income, and we’ve never seen the proportion of current income that has to service that debt,” he said. “The consumer has dipped into saving in a meaningful way — we’ve had 20 months in a row of negative savings. That can’t go on forever because you just exhaust savings.”

Friday’s report showed the job losses spreading beyond manufacturing and construction and into retailing and financial services.

But health care and education, leisure and hospitality, government and various professional and business services were among the sectors adding positions.

The relatively strong outlook for service jobs was boosted by a report Thursday from the Institute for Supply Management, an industry group that publishes a widely watched index of business activity. That index rebounded strongly in April, posting its biggest gain in year, with the finance and insurance industry among those sectors reporting growth.

“[That’s] a positive indication that the sharp escalation of subprime mortgage problems in February and March may have peaked at the end of March and abated somewhat in recent weeks,” wrote economist Brian Bethune of Global Insight.

But it remains to be seen whether the financial impact of the collapse of subprime lending has run its course. That’s because many of these mortgages were bundled into pools of loans, chopped up into securities and sold off to investors and hedge funds. Because the holders of these so-called “collateralized debt obligations” can delay taking losses, it may be some months before the full impact of the subprime mortgage meltdown is known

“They can hold on for some time as credit quality continues to erode,” said Zandi.

The Swiss bank UBS became the latest casualty of the U.S. mortgage market when it surprised investors Thursday by reporting lower first quarter profits and said it was closing down its Dillon Read hedge fund because of heavy losses in subprime loans.

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