Good News on U.S. Unemployment

The late May and early June financial market sell off had many causes, but among the most important was the sputtering recovery in the U.S. jobs market.  In fact, the data for about five weeks now has been mixed to down.  Until now.

Separate jobs figures this week indicate a job market that appears to be picking up steam.

First, Automatic Data Processing (ADP) the massive payroll firm, reported that private sector employers added 157,000 jobs in the month of June.  This compares to just 36,000 jobs created in the month of May.

Second, the U.S. Department of Labor said that initial jobless claims fell this past week by 14,000 to a level of 418,000 new jobless claims filed.  Because this data is so volatile, typically the more important number is the four week moving average.  This tally shows 3,000 fewer jobless claims being filed and an average level of initial jobless claims of 424,750.

Analysis: The most important aspect of this story is the high number of private sector jobs added.  Why? Because private enterprise has sat on the sidelines with literally trillions of dollars of cash since 2010 and businesses have not spent their cash or their profits on either new growth projects or new employees.

Businesses have made this choice because the economic recovery has not been strong enough to convince them that making the large investment in new employees is worth it.  But the lack of improvement in the employment situation has made consumers skittish.  In turn, they have not spent much money, which has made businesses nervous.

This economic “game of chicken” between employers and consumers is something that I have been writing about for the last year.  For the vicious circle to be broken one of the two parties needs to show some courage or be given some encouragement.

Consumers should be forgiven for being nervous.  After all, most of the job layoffs were executed by companies that are still in business.  So the losses of the Great Recession were borne mostly by employees and investors, not by big business.

Yet, businesses seemingly do not have a moral reason to invest in new jobs.  But businesses could be given an incentive to hire new workers by Congress.  But here I digress.

For the Great Recession to finally be declared over, and not just technically, the unemployment rate in the United States needs to return to about the 7.5% range.  And for this to happen private enterprise has to start hiring.  That’s why the ADP report about the high number of private sector jobs created is good news.

Now for the slightly bad news in the unemployment reports: the absolute number of initial jobless claims remains above 400,000.  Beyond 400,000 being a nice round number it is important for another reason.  Why?

For the U.S. jobs situation to improve it isn’t enough for those who lost work in the Great Recession to get new jobs.  No; and the reason is that the U.S. working population keeps growing just because of the birthrate.  So the U.S. economy has to, not only replace jobs lost, but also create new jobs.  A level of jobless claims above 400,000 generically means that the economy is not doing this – a bad thing.  Whereas, a level of jobless claims below 400,000 means that jobs are being replaced and created – a good thing.

Importance grade: 10; now that investors seem to be turning their attention away from the twin debt crises of Greece and the U.S. (which I don’t consider to be a smart thing), they were likely to turn their critical eye toward the anemic U.S. jobs market.  When that happened they would have seen weakness and that would have led to a a decline or sustained weakness in financial markets.  That chance is now shrinking.

Jason