Euquant

July JOBS REPORT ASSESSMENT

The economy underperforms expectations: In a word, the unemployment report this month is a bit disappointing but not totally unexpected. The unemployment rate remained constant at 9.5% which is the one bright spot. The down side is that we lost 131,000 jobs in total (the government sector lost 202,000) and added only 71,000 private sector jobs. We were hoping to lose about one half that many total jobs and were hoping to gain about one and one half that many. Other notable developments were as follows: The size of the labor force shrank by 181,000 persons, the third monthly decline. This is a concern because we would like to see the labor force growing because people are re-entering the market looking for jobs. Also, the number of persons who are part-time who wish to be full time declined by 98,000. This is also not a good sign.

What must be done? The only healthy sector of the economy is the corporate sector where profits are up significantly. But, they are sitting on piles of cash, and are still cutting costs rather than investing. We must find a way to get them to part with the cash via new investment! Cash hoarding is a major bottleneck in the current environment. In fact, the nation’s largest nonfinancial corporations are currently sitting on $1.8 trillion in cash, and not engaging in much new investment or significant hiring. This cash is an increase of over 25% from the beginning of the recession. There are two reasons why this is happening: first, they are uncertain about the future and have no intention of getting caught short if the economy should tank. Therefore, they are building up a rainy day fund. Secondly and more importantly, low interest rate (the federal funds rate is at .25%) makes it possible for them to sell corporate bonds and borrow cheaply and hoard it. We must figure out how to turn this around.

1.     UNEMPLOYMENT RATE: The level and movement of the unemployment rate are the most closely watched signal of the health of the job market. If the economy has created more than enough jobs for individuals who have entered the labor market, we expect the unemployment rate to decrease. The consensus estimate for August is an increase to 9.6% from 9.5%. The actual unemployment rate was

Date	Rate
April	9.9%
May	9.7%
June	9.5%
July	9.6% forecast
July	9.5%

2.     NUMBER OF JOBS CREATED: The number of jobs created during the month is the second most closely watched job market indicator. During any given month, new jobs are added to the labor market and old jobs are destroyed. A healthy economy adds more jobs than it destroys and the US economy needs to add about 150,000 jobs on net each month to accommodate the growth of the labor force. The consensus estimate for the net change in jobs during July was -60,000 to -65,000. The actual number of jobs lost was 131,000.

Date	Rate
April	+313,000
May	+433,000
June	-125,000
July	-60,000 forecast
July	-131,000 (gov’t empl fell by 143,000)

3.     PRIVATE SECTOR EMPLOYMENT: It is the health of the private sector that will ultimately determine the future direction of the economy. Private sector employment is a very volatile number, meaning that it swing from one month to the next. The consensus estimate for the number of private-sector jobs gained was +100,000. The actual number of private-sector jobs was +71,000.

Date	Rate
May	+33,000
June	+85,000 (115,000) estimated for June
July	+100,000 estimate
July	+71,000

4.     THE SIZE OF THE LABOR FORCE: Changes in the size of the labor force does not get much attention. Yet, it is one of the most important indicators of the health of the economy. A strong economy is characterized by a growing labor force. Our labor force has declined for three months in a row.

Date	Civilian labor Force (000)
April	+ 805
May	-322
June	-652
July	-181

Other figures:               June     July
White unemployment rate     8.6%     8.6%
Black Unemployment Rate     15.4%     15.6%
Hispanic Unemployment Rate     12.4%     12.1%

Thomas D. Boston, August 6, 2010
Professor of Economics at Georgia Tech and CEO, EuQuant