Unemployment: The one figure that really matters

Pure and simple: the U.S. equity markets want “good numbers”, as in employment and unemployment statistics. Also, there really is no recovery out of this recession unless employment improves.

When the equity markets don’t get what they want, they generally sell off. And absent more sovereign debt calamities abroad (which make the U.S. capital markets relatively more attractive and therefore a haven for foreign investors), the U.S. markets will remain focused on the employment issue.

In this economy of 9.5 percent nationwide unemployment, “good employment numbers” simply means that employment is increasing and unemployment is decreasing. No fireworks. No hallelujah chorus. No rabbit expected (or projected) to pop out of a hat. No, just momentum in the right direction is considered good news.

As reported by the Bureau of Labor Statistics last Friday, weekly jobless claims rose for the prior week and June’s monthly unemployment was revised significantly downward. True, for July, the percentage of unemployed did not worsen; it remained the same at 9.5 percent or 14.6 million unemployed. (For perspective, unemployment hit 9.5 percent in June of 2009 and peaked at 10.1 percent in October of 2009. Since the October peak, unemployment has been decreasing until this current “stall.”)

A few more stats to put the picture in perspective. Of the unemployed, about 45 percent are long-term unemployed, having not worked in more than 27 weeks. Also, there are now 1.2 million “discouraged” former workers — they have stopped in their attempts to find work and they are no longer counted as unemployed. And the “involuntary” part-time worker count has been falling, these people want more than part-time work but can’t get it.

Non-farm employment for July was down from the prior month by 131,000 and most of it was a census worker no longer on payroll. The last strong hiring month was May 2010 with a gain of 433,000 workers.

Can these reported numbers be revised? Yes, and dramatically. June non-farm employment was first reported as a loss of 125,000 workers but as of Aug. 6, the June number was revised downward to a loss of 221,000 workers. That is a very big downward revision.

All of these employment/unemployment reports on Friday, Aug. 6, came on the heels of prior week’s report of second quarter GDP that came in at an annualized rate of 2.4 percent. This sounds okay, but consider some other facts.

A rule of thumb is that it takes 2.5 percent annualized GDP growth to get movement in reducing unemployment. Consider too that J.P. Morgan expects this GDP number to be revised downward in future months to 1.7 percent.

The markets are seeing flat-lined GDP growth and flat-lined unemployment. That’s a best-case scenario, at worst, they are thinking the numbers will get subsequent revisions downward and/or the following months will not be flat — rather they will have worsened.

The markets want a sense that all the U.S. government debt that was incurred to jumpstart the economy actually did so; that the jumpstart had a “multiplier” effect and that it was not simply a dollar for-dollar exchange.

Beyond a concern that debt is being incurred for a stimulus program that didn’t work too well, the capital markets are concerned that a second round of stimulus might ultimately get legislative approval. The further thinking is that a second jumpstart will have the same little, if any, growth effect for the economy.

Government stimulus worked well in past recessions; by this stage of recovery, the annualized growth in GDP was 6-8 percent — not 2.4 percent. This begs the question: Why is this recovery so anemic?

A wide variety of experts offer a wide variety of answers. One answer is that the nature of the recent government spending was not particularly wise…. as in job training for non-existent jobs, as in census workers hired for a few months, as in cash for clunkers, etc. Very little was devoted to infrastructure or capital projects.

Another reason given for the lack of multiplier effect from the government spending relates to the degree of leverage already in the U.S. economy (estimated at more than 325 percent of GDP if debt from government, banks, private non-financial and the consumer is added all together.) In a greatly leveraged economy such as ours, it is thought that every dollar of government expenditure financed by debt has a decreasing level of effectiveness in a society already burdened by very high levels of indebtedness.

The bottom line is this: There will be no recovery from the Great Recession as long as there is high unemployment. At best, the employment picture shows no momentum, many of the government stimulus programs have ended, and private sector job growth is down from March and April.

So, in your planning for your business, you might want to consider the possibility that the malaise might continue for a much longer time and/or that it very possibly could worsen. 

— Jeannette Rohn Showalter is a Sou thwest Florida-b ased chart ered f inancial analyst, considered to be the highest designation for in vestment pr ofessionals. She can be reached at jshowaltercfa@ yahoo.com.