Figure 1: Key Labor Market Indicators
Source: Calculated Risk
Although the pace of jobs created ticked up in July to 163,000, the unemployment rate also increased to 8.3%, which both data points will give all political parties good talking points because these are the highest since February 2012. The stock market cheered the news early on, but knowing that an incumbent president has not won re-election with an unemployment rate above 8% since World War II, President Obama must know he has to change his failed policies. Moreover, the unemployment rate projections the president's administration made before the implementation of the American Recovery and Reinvestment Act ("stimulus") in 2009 do not come close to reality (see Figure 2).
Figure 2: Projections Are Not Close to Reality
Some will argue this is due to a more severe economic decline during the Great Recession not known when the projections were made. This argument is precisely why discretionary, temporary stimulus programs fail to achieve their intended objectives and create more uncertainty and distortions in the markets than help rescue the economy (see Figure 3).
Figure 3: Worst Job Losses and Recovery Since WWII
Source: Calculated Risk
Furthermore, we are unable to determine what would have occurred had the government not acted. It is quite possible that the steep decline in the economy would have provided corrections where needed and a more persistent, thriving recovery based on market fundamentals would have prevailed. The economy is much like a basketball. The harder you push the ball down when dribbling, the faster it will rebound from the ground. The number of job losses was severe, but after trillions of government stimulus dollars and trillions added to the national debt, the growth rate of job creation is the worst since WWII.
Let us get to the data. Despite a positive signal for the net number of jobs created last month from the establishment survey, the household survey — used to calculate the unemployment rate, indicates there were 195,000 fewer individuals employed compared with June. Moreover, those reporting they were unemployed increased by 45,000 to 12.8 million, which means that 150,000 dropped out of the labor force, pushing the labor force participation rate lower. This increase in the number of discouraged workers boosted the U-6 unemployment rate — includes unemployed, discouraged workers, and underemployed — to 15%! Data for individual states' underemployment rates also indicate higher rates than their popularly reported unemployment rates.
With the volatility in both the numerator (unemployed) and denominator (labor force) of the unemployment rate, it is a terrible signal of the labor market. However, the employment-to-population ratio is a better indicator because while the numerator (employed) is volatile, the denominator (adult population) is not, providing a more accurate picture of the health of the labor market. Although the unemployment rate has declined from a high of 10% in October 2010, the employment-to-population ratio remains essentially unchanged since late 2009 around today's reported 58.4%. Other data indicate that average hourly earnings are up 1.7% over the last year to $23.52, but remember this is only helpful for those who have a job and real earnings continue to fall.
Overall, the headline net number of jobs created will get the most news, but this is another weak report. 163,000 jobs created are barely enough to keep up with the monthly average number of individuals entering the labor force. The number of workers exiting the labor market because they are tired of looking for a job is discouraging and will put upward pressure on the unemployment rate once these individuals start to look for a job in the future.
Government manipulation of any market results in distortions that will create unintended outcomes. Unfortunately, the unintended outcomes in the labor market are unemployment, dependency, and poverty. While all political parties try to make a point about today's news and despite our differences on the causes and solutions to the problems, let us keep in mind the facts and get around the rhetoric.
What is your opinion of today's report and solution to the problem?