Reading the Unemployment Tea Leaves

ICangles Investment Post…

Looking into and understanding the devil of the details in government employment and economic reports reveals that the job market is likely to remain poor for some time to come. This most recent report however was marginally positive. The Labor Department reported on Friday that the unemployment rate rose slightly from 9.5 percent in July to 9.6 percent in August. In the stock market everything is relative, and relatively speaking the results of a slight increase were marginally positive because economist expected an even bigger rise in unemployment. The stock market response might have been called a relief rally had it been stronger, but it was more of a relief pop with the Dow Jones Industrial Average rising a little over 100 points.

Other details also played a role in a positive response to the full report. Private companies actually added 67,000 jobs, and unemployment was higher largely due to the anticipated layoff of temporary census workers by the government. The gain in private payrolls was focused around health care and temporary staffing. Although the report helped ease some concerns about a double-dip recession, the numbers could only be considered positive when measured against even gloomier expectations.

In fact the unemployment situation is far worse than the Labor Department’s report indicates. A single number that better represents the true employment picture is the underemployment rate. The government’s unemployment number does not include people who would like a job but have given up looking, have been out of work so long they no longer qualify for unemployment or desire a full-time job and have only found part-time work. The underemployment rate includes these people, and as reported by Gallup rose slightly to 18.6 percent (see below chart). In other words nearly two in every ten Americans who want full time work cannot find it.

For businesses there is a little bit of good news here in that they should see little in the way of wage pressures, should be able to continue getting high productivity rates out of their existing employees and have a large pool of applicants from whom to hire for any future openings. But an underemployment rate of over 18 percent is when all is said and done bad for everyone. Businesses need to sell products and in this employment environment consumers are less likely to buy anything out of either a lack of money or fear for the future.

Now it should be mentioned that employment is one of the last business indicators to recover after a recession. Businesses are cautious about adding full-time workers after a recession and tend to wait until they have little choice but to do so in order to meet customer demand. But with the latest quarterly GDP growth numbers coming in at below two percent there is little sign of the employment picture turning around anytime soon. In addition this is a very high historical underemployment rate, so it’s going to take some sustained strong job growth to create a positive labor market. In other words the employment environment is going to remain poor for some time to come.

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