Euquant

Economic Outlook: Simply put, the unemployment report this month is not good. Forget about the fact that the unemployment rate decreased from 9.7% to 9.5%. The reason this occurred is because the labor force decreased by 652,000 workers; individuals who were mostly unemployed are now no longer included in the unemployment figures. The troubling signs in the labor market are reinforced by looking at several other numbers. First, the number of jobs created decreased by 125,000 (the decrease was about equal to expectations). The decrease was caused by the layoff of temporary census workers, but beneath this decrease there occurred an increase of only 85,000 private sector jobs. While this is a positive sign, it is much less than what was expected and only about one half of the number of jobs that are required to accommodate those who are unemployed. As a result, the number of workers who became discouraged because they could not find employment increased.

So what is going on in the economy? To fully understand there are two factors we have to keep in mind; First, the factors that influence how the labor market behaves in the long run, and second, the factors that influence the behavior of the labor market on a month-to-month basis. In the long run, the economy is struggling against the forces of global competition. While the financial meltdown caused the severe recession, it is without question that sooner or later the economy would have experienced significant labor market hardships because businesses, both large and small, would have had to make significant cuts in employment in order to become more competitive. The financial meltdown gave them the cover to undertake those cuts at one time. In short, it allowed the business sector to subject the labor market to shock therapy as a way of adjusting to global competition. To bring unemployment down to normal levels it will take years, along with significant and continuous improvement in productivity and new commercial ventures, such as green technology. As this occurs, these new ventures and new technology will spin off new businesses that will employ increasingly larger numbers of workers. It is very unlikely that even under the most optimistic scenario; existing businesses will rehire large numbers of the workers they have laid off.

Most attention is now focused on short run adjustments. The question is, why has the economy seemingly hit a brick wall? Less than two months ago the economy was poised for a surprisingly robust growth, and more recently we have seen a precipitous plunge in consumer and business confidence, a cutback in retail spending, and a significant decline in pending home sales. All of these factors are occurring despite the fact that the economic fundamentals would suggest otherwise. The growth in the economy has been impeded by a number of recurring supply shocks that are depressing consumer and investor confidence and optimism. The most significant of these shocks are the European debt crisis and Gulf oil spill. Along with a number of natural disasters, these factors are contributing to a growing sense of doom and gloom for consumers and investors. To grow the economy robustly, we must have a euphoric environment that encourages spending and investment rather than discouraging and depressing them.

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 June is 9.7% to 9.8%. The actual unemployment rate was 9.5%

Month	Unemployment Rate
March	9.7%
April	9.9%
May	9.7%
June	9.7% -- 9.8% (estimated)
June	9.5% (Actual)

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. Last month, 433,000 jobs were added to the labor market but 390,000 of those jobs were in the government sector and were held mainly by census workers. The month of May was the peak of census employment and about 586,000 workers were employed as census takers. As these numbers wind down, we expect to see a significant decrease in the number of new jobs. The consensus estimate for the net change in jobs during June is between -130,000 to -150,000 jobs. The actual number of jobs lost was 125,000. Note that -225,000 census takers lost jobs during the month, an expected cutback.

Month	Number of Jobs Lost
April	313,000
May	433,000
June	-130,000- 150,000(estimated)
June	-125,000(Actual)

3.PRIVATE SECTOR EMPLOYMENT: It Is important to know how many of the total new jobs added to the economy each month were generated in the private sector, particularly since census employment is temporary and ultimately, it is the health of the private sector that will determine the future direction of the economy. Private sector employment is a very volatile number, meaning that it may have a large swing from one month to the next. The consensus estimate for the number of private-sector jobs was 115,000 and the actual number of private-sector jobs was +85,000. The largest number of positive job gains occurred in the following industries; leisure and hospitality (28,000), professional and business services, especially temporary services (21,000), transportation and warehousing (15,000), and healthcare employment (9,000).

Month	Number of Jobs Added
April	241,000
May	33,000
June	115,000(estimated)
June	85,000(Actual)

4.THE SIZE OF THE LABOR FORCE: Changes in the size of the labor force do not get much attention. Yet, it is one of the most important indicators of the health of the economy.

Month	Civilian Labor Force	Change in Civilian Labor Force
April	154,715	805,000
May	154,393	-322,000
June	153,741	-652,000

5.DISCOURAGED WORKERS: If an individual is unemployed and has not made an attempt to find a job over the last month, because he or she is discouraged about their prospects of being employed, the individual is classified as a discouraged worker. As the economy improves, we expect the number of discouraged workers to decline significantly because individuals will reenter the labor market with the expectation of being able to find a job. The current number of discouraged workers (1,083,000) is more than double what it would be in a healthy economy. For example, the average number of discouraged workers in 2007 was 369,000. The current number of discouraged workers is 1.2 million. Persons employed Part-time for economic reasons decreased by 59,000 from 17.93 million to 17.87 million. The Number of discouraged workers in April, 1,197; May 1,083 and June;1,200;
By Thomas D. Boston, Professor of Economics at Georgia Tech and CEO, EuQuant