How the November Jobs Report is linked to Greek Debt
November – The November jobs report showed the rate of unemployment decreased from 9.1% to 9.0% in October. This is good news and bad news. The good news is that it appears the mounting uncertainty around the European debt crisis failed to draw the US economy into a double-dip recession. The bad news is that jobs are being created at an extremely slow pace. In fact, so slow that it is difficult to convince 13.9 million unemployed persons that the last recession ever ended. A good portion of the slow growth is being caused by the sovereign debt crisis in Europe.
Economists had expected to see a larger increase in the number of private sector jobs; instead only 104,000 were added. This means that after the government’s 24,000 job cuts are subtracted, only 80,000 new jobs were created in October. A more favorable number would have been 125,000 — yet that is only one-half of what is needed each month to actually reduce the high rate of unemployment significantly.
Certain sectors of the labor market showed improvements that are worth noting. For example, the extremely high unemployment among teenagers continued to decline, from 24.6% to 24.1%. Unemployment among African-Americans also declined. After peaking in August at 16.7%, the unemployment rate among blacks decreased to 16.0% in September and declined further to 15.1% in October. Unfortunately, the unemployment rate for persons with less than a high school educational level did not change much and remains at 13.8%. Perhaps the biggest labor market development occurred among the 9.3 million people who are unemployed i.e., those who would like to work full- time but can only get part-time work. Their number decreased by almost 400,000.
The jobs report conveyed an economy that has continued to avert a recession, but one that is so weak it may be knocked on its side by a shock from the euro zone debt crisis. The parties in Europe have still not found an agreeable solution for Greece’s massive debt, which now stands at 1.6 times the value of the goods it produces each year. Greece is a relatively small player among the world’s economies, but the potential domino effect of a default in Greece has caused major fear among financial institution and prominent world economies. If Greece sneezes, the rest of the world may actually catch its cold. Large US financial institutions are heavily invested in euro zone countries and the big three banks, Bank of America, J.P. Morgan and Citigroup each have over $14 billion invested in the five countries that top the honor roll of European debt; Greece, Italy, Ireland, Portugal and Spain.
Whichever way the debt crisis unfolds in Europe, the US economy loses. For example, a failure to resolve the debt crisis in Greece means that investors will become more reluctant to rescue the remaining four countries. In the US, this scenario will play itself out by banks cutting back further on their willingness to lend and stockpiling even more cash – a behavior that has already slowed growth by making consumer borrowing extremely difficult, greatly reducing corporate investment, and making mortgage loans next impossible. As a result, the housing crisis drags on like a cancer sore.
On the other hand, if the European debt crisis is resolved, the outcome is likely to be only marginally better. An important ingredient to resolving the crisis is forcing bondholders to take it on the chin by writing off a large percentage of the value of sovereign debt they hold. This write down will be reflected on the balance sheets of banks as a decrease in assets. The disappearing assets will once again make them resistant to part with money. All of this reminds me of the old saying– heads you win, tails I lose.