Friday, September 7, 2012

Unemployment rate drop looks good but really isn't

So..., what's next?
The unemployment rate fell from 8.3% to 8.1% in August, but there's little reason to cheer. Despite the "look" of the declining unemployment figure, the monthly report contains bad news and worse news.
The bad news is the meager 96,000 jobs created during the month. While most expected August numbers to decline a bit, analysts were predicting something like 120,000 jobs created. With just 96,000 jobs, the unemployment rate should have gone up. About 150,000 jobs a month need to be added just to keep pace with working-age population growth.
The worse news is the reason the unemployment rate dropped. Many Americans - about 368,000 of them - simply stopped looking for work in August. The bulk of those who dropped out of the job market are young people, aged 16-24. We cannot attribute the decline to students heading back to school (as much as we might like to), because the statistics factor in those seasonal changes. This is a strong indicator that the economy currently has nowhere to put young people seeking jobs.
There were some bright spots in the report - or maybe we should just call them "less dark" spots - for adults 25 and older. The unemployment rate for both the "prime" 25-55 group and the over-55 group legitimately dropped due to hiring. The "prime" group unemployment rate fell slightly from 7.2% to 7.1%
However, the message of the report is clear: To get the economy back on track, American jobs will need to grow at far better than the 96,000 jobs per month rate shown in the August report.
My friends on the political Right probably will not be happy about it (Squawk as they do in this election year about the government not doing enough to put people to work, they really don't want government involvement in these matters), but this jobs report should trigger some stimulus measures by the Federal Reserve. Fed Chairman Ben Bernanke, who had previously pledged action only if the economy worsened, recently indicated that action would be taken if the economy did not improve noticeably.
Just what the Fed will do to increase employment remains to be seen. But a likely course seems to be additional "large asset purchases," which would further improve the financial markets. (The Federal Reserve has already done this twice before.) Another option that has been mentioned is a promise by the Fed not to raise interest rates until certain economic objectives are reached.

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