Jobs Down, but Unemployment Rate Up?

The melt-up in the S&P500 continued last week.  The index closed up 2.3% primarily on news that the economy only lost 247,000 jobs in July, not as many as feared.  The VIX eased but remained poised to jump up at the slightest hint of trouble.

The fundamentals were still not strong.  Corporate earnings for Q209 have had a strongly recurring theme:  sales for most companies are down, anywhere from 5% (eg. Kraft) to 40+% (eg. Caterpillar) year over year; but profits are down much more.  In terms of profits, the market is cheering that many firms are “beating” the trampled “expectations” which were set way too low.  Profits are getting crushed, but because they’re not getting crushed as much as anticipated, the market smiles.

Economic data continue to struggle.  ISM manufacturing is still in contraction mode.  Personal incomes came in below expectations.  Initial claims were 550,000–still very weak.  And continuing claims rose to 6.3 million; again, this number would be much higher were it not for the loss of benefits (ie. folks are leaving the continuing claims pool because they’re running out of benefits, not because they’re getting jobs) .

Speaking of jobs, how can it be that the July figures reported a LOSS of 247,000 jobs and yet the unemployment rate DROPPED to 9.4% from 9.5%?  This rate was also cheered as a sign of good news.  But is it really as good as it seems?

In fact, given how the unemployment rate is calculated, it is perfectly possible to show a lower rate (good) even when jobs are lost (bad).

How?

Let’s pretend that the economy has 100 people, all of whom are either working or unemployed (but looking).  Let’s assume that, out of these 100 folks, 9 are unemployed (but looking) and 91 are employed.  In this case, the unemployment rate would be 9.0% (9/[9+91]). 

If one person loses their job, and joins the ranks of the unemployed (but looking), then the rate rises from 9.0% to 10.0% (10/[10+90]).

But what if two people from this group of 10 unemployed (but looking) STOP looking–during same month the one person lost their job? 

Well, these two people would drop out of the equation completely.  In this case, the ratio changes to 8/[8+90] and presto, the unemployment rate DROPS to 8.2%–lower than the original 9.0%!

This is exactly what happened in July.  While 247,000 lost their jobs, 422,000 stopped looking and left the pool entirely. 

Not so good.

Other disturbing trends: 

The ratio of people unemployed longer than 27 weeks ROSE to 34% of all unemployed (but looking)–the highest percentage on record.

The ratio of employed people relative to the entire adult population (looking or not) FELL to 59.4%, the lowest level since the early 1980’s.

The bottom line with jobs is that people are still losing jobs at a staggering rate.  They’re not getting hired.  They’re losing their unemployment benefits.  They’re giving up looking.

How can this labor situation propel consumption (70% of our economy) to create a true sustainable recovery, a recovery that can gain traction without the herculean (but utterly unsustainable) boosts from our federal government?

Give up?  So do I.

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