Employment increases from small business is the key to a sustainable economic recovery in the US. Traditionally, employment has not been a leading economic indicator because since WWII we’ve always been in a credit and banking expansion. Now that is no longer true, and in fact banking and credit are contracting. Because of this, the some of the previous economic recovery indicators don’t apply. Employment is absolutely key. It is so because employment alone will do more to address everything that is broken :
  • consumers can pay down debt.
  • consumers can spend
  • consumers can save & invest
  • consumers can pay more tax (local, state, federal)
  • reduce bankruptcy filings
  • buy homes / not be forced to sell their home / reduce foreclosures.
 
The upshot is unemployment continues to set records (in a bad way) and will continue weak for all of 2010. I doubt initial claims will drop below 9%, and I also doubt the full unemployment stat (U6) will drop below 14% at any point this year.
 
2011 will be weak because taxes will go up in 2011 (Bush tax cuts expire + more tax increases.). The tax increases from federal, state, and municipal governments when introduced to a very weak economy will cause it to stall. Then the second part of the recession will kick in (if it does not happen in Q4 this year). Please keep in mind that the US stock market loses 40% ON AVERAGE when the US has a recession — and the condition of the US economy will still be distinctly below average by 2011. I place the chance of re-testing the March 2009 stock market lows at 50%, and I place the odds of seeing the Dow at 8500 (S&P500 at 850) at 80% in 2011.  While this is going on, long term US Treasuries and any other long term bond is going to face losses (we don’t own any).   

 

 

The Data:

 

Unemployment data for the month of March was released last Friday. The headline was unemployment stayed at 9.5%, and 162K jobs were created. On the surface that sounds like the beginning of the employment situation improving. Well, it is an improvement, but it is a very lackluster one and subject to revisions.

Here’s what you need to know: 

  • we need to create roughly 185k new jobs per month — and not from the government — to keep up with population growth plus the impact of people that will come back into the labor market that have given up looking for work. 
  • half the 162K gains (82K actually) were from estimates by the government (BLS) about the number of new small businesses formed. BLS unemployment data are subject to continual revisions after the fact.
  • 48K jobs came from US Census hiring. We’ll see more Census hiring in next month’s jobs data– probably closer to 100K new jobs for the census. Note: these jobs only last 3-4 months.
  • almost 400K new people were added to the US labor pool. The reason the unemployment rate did not rise was 238K people fell out of the unemployment claims altogether because they gave up looking for work. I’ll leave it up to you to consider whether our country is stronger or weaker now that 238K more people don’t have work and gave up. 
  • 44% of the unemployed have been so for over 6 months. This is a record. It speaks to the hopelessness of those without jobs. On a related note, the U6 figure (initial unemployed + long term unemployed) is almost at 17%. 1 in 6 Americans can’t find full time work that need it. The same figure supplied from the Gallup organization claims the the statistic is 20.3%. They say 1 in 5 can’t find a job.
  • the probability of an unemployed person in February finding a job in March dropped to an all time low of 18.7%. (records go back to 1948)
  • So in order to lower the unemployment rate from 9.7%, we need to see much larger monthly job creation figures. More like 300K+.  That’s not in the cards for 2010. We’re likely looking at 15-20 years until we get back down to 5% unemployment (aka full employment).