Guess What? Unemployment's Really at 16.3 Percent

John Lott
- FOXNews.com
- August 07, 2009

Guess What? Unemployment's Really at 16.3 Percent

How is it possible for the unemployment rate to essentially remain unchanged when 247,000 jobs have been lost? Because the number of people who gave up and stopped looking for work rose dramatically.

The announcement today that the unemployment rate declined slightly to 9.4 percent in July while only 247,000 additional jobs were lost has been greeted as good news. The change in the unemployment rate puts the rate at what it was in May. Yet, even a rough look at the numbers indicates that the true unemployment rate has been getting significantly worse over the last few months.

How is it possible for the unemployment rate to essentially remain unchanged when 247,000 jobs have been lost? The reason is simple -- the number of people who stopped looking for work rose dramatically. Six hundred thirty-seven thousand additional people (637,000) no longer consider themselves looking for work. This is by far the largest drop in the number of people who consider themselves in the labor force during the last year. -- It is almost twice the 358,000 increase in the people who left the labor force during June and almost four times the average monthly increase of 167,333 over the last year. Jobs are sufficiently scarce and the prospects of people finding them at wages that they are willing to work for so low that many individuals don't think that it is worth their time to even look for a job.

Part of the drop in unemployment is also due to the fact that some people are running out of unemployment benefits and taking part-time jobs. There is usually a big increase in the rate that people find jobs during the last few weeks that they have unemployment benefits. In July 102,670 people saw their unemployment benefits run out. That number rose to 141,538 in August and is expected to soar to 486,049 in September. It will keep on rising each month hitting 1.5 million in just December alone. This past Sunday on ABC's "This Week" Treasury Secretary Tim Geithner only promised "to look very carefully at [these lost benefits] as we get closer to the end of this year." Larry Summers, President Obama's chief economic advisor, was similarly noncommittal when he was interviewed that same day on CBS's "Face the Nation."

If we include the normally counted number of unemployed as well as those who have recently given up looking for work and those who have taken a part-time low paying job because they can't find full-time work, the implication is that the unemployment rate for July would be at 16.3 percent These discouraged workers will again look for work once the economy starts to improve, but this 6.9 percentage point gap between publicly discussed unemployment rate and these discouraged workers is unusually large.

The changes in unemployment also mask the large drops that are still occurring in private employment -- construction, manufacturing, retail trade, and professional and business services all suffered large declines. The two of the three areas where employment has increased are government related, either education and health services or general government employment.

These changes do coincide with what is happening with GDP. During the second quarter the private sector kept on shrinking at an annual rate of 3 percent. Overall, GDP declined by "only" 1 percent at an annual rate, but that was because real federal government consumption expenditures and gross investment soared by 11 percent. Real state and local government consumption expenditures and gross investment increased, too, but by a more modest 2.4 percent.

The large and growing number of discouraged workers will make the real unemployment rate hard to bring down in the future.

John Lott is an economist and author of "Freedomnomics."

White House still warns of 10 percent jobless rate

White House still warns of 10 percent jobless rate

By BEN FELLER, Associated Press Writer Ben Feller, Associated Press Writer 2 hrs 56 mins ago

WASHINGTON – President Barack Obama on Friday welcomed a dip in unemployment as evidence "the worst may be behind us" with the recession well into its second year. Earlier, however, the White House said that the president still expects unemployment to hit 10 percent sometime later this year.

White House press secretary Robert Gibbs said the two positions don't contradict each other.
"I would describe the report that came out today as the least bad report that we've had in a year," Gibbs said. "But we still have a long way to go."

The new Labor Department numbers show that employers cut 247,000 jobs in July, another job loss but also the smallest reduction of any month this year. The unemployment rate dropped marginally from 9.5 percent to 9.4 percent, although one of the reasons for that change is that hundreds of thousands of people left the labor force.

"Today, we're pointed in the right direction," Obama said in brief remarks in the Rose Garden hours after the report was released. "While we've rescued our economy from catastrophe, we've also begun to build a new foundation for growth."

Even so, Obama said: "We have a lot further to go. As far as I'm concerned, we will not have a true recovery until we stop losing jobs." He also said he won't rest until "every American that is looking for a job can find one."

The president used the new jobs figures not only to pitch the benefits of the already passed stimulus package but also to press for policy changes on health care, education and energy that he seeks.

"We can't afford to return an economy based on inflated returns and maxed-out credit cards," he added. "It won't be easy. ... We have a steep mountain to climb and we started in a very deep valley." But he added that he was confident the country could pull itself out of the slump.

The initial White House reaction to the new employment numbers was mostly guarded.

"None of us loses sight of the fact that last month a quarter million people lost their jobs," Gibbs said. "The long-term unemployment rate is increasing. People are going to begin exhausting their even extended unemployment benefits soon."

"I think it's going to be quite some time before we start seeing genuine, sustained, positive job growth," the spokesman said.

Obama has urged Americans to be patient and give time for his $787 billion stimulus package of tax cuts and increased government spending to take hold. Gibbs contended there could be no doubt the stimulus plan has contributed to the slowing rate of job losses.

400,000 and 9.8%

Friday Look Ahead: July Job Losses Seen Slowing

Published: Thursday, 6 Aug 2009 6:51 PM ET

By: Patti Domm

July's employment report could show job losses abating more than expected, even as the unemployment rate creeps closer to 10 percent.

Wall Street economists were still crunching their forecasts Thursday, with some coming in well under what had been the street's consensus.

"The consensus is for right around minus 325,000 and that consensus has slowly risen, as evidenced by Goldman and Deutsche today. That tells me that if it's true, the position of the street is it's bracing for a stronger than consensus print," said RBS head Treasury strategist Bill O'Donnell. He said bonds had been pricing in some fear about the number. "For the bond market, the fear is a less negative number, which would be good for stocks."

Goldman Sachs economists Thursday trimmed their forecast from -300,000 to -250,000 and maintained an expected unemployment rate of 9.7 percent. Deutsche Bank chief U.S. economist Joseph LaVorgna revised his forecast for non farm payrolls to -150,000, from -325,000.

The improved outlook for jobs follows on a batch of raised expectations for third quarter GDP in the past week. Many economists now expect the quarter to show growth, based on recent economic data and some optimism that the automobile industry is gaining traction from the "cash for clunkers" program. The benefit from "clunkers" may be temporary, however.

"The economy is growing this quarter. I think the job loss has been extreme because a lot of it has to do with the financial crisis immediately following Lehman. If GDP is turning positive for the first time against that backdrop, it seems reasonable at some point that the rate of job losses would slow and slow quite markedly," said LaVorgna.

"When you're at an economic inflection point, as we are, we think right now the improvement in payrolls tends to be greater than the improvement in (unemployment) claims," he said.

On Thursday, the government said new claims for unemployment benefits fell to 550,000 last week, from a revised 588,000 the week earlier. Economists had expected 580,000 new claims.

Goldman Sachs economists, in a note, said one reason they changed their forecast is because of a stabilizing in the economy and an improvement in jobless claims, which indicates improvement in the labor market. Goldman pointed out that its view is for a better outcome even after correcting for the seasonal distortions created by the shut down of auto plants. It also notes that the short-term hiring and then firing of government census workers reduced payrolls by 49,000 in June.

However, Mesirow Financial chief economist Diane Swonk said she's sticking to her forecast for losses of 400,000 payrolls. "I actually think it's going to be a worse number, more like 400,000, but I'm not sure how relevant that is because we're going to see improvement in August and September given the (automobile) production schedule," she said.

"The other issue is the shadow unemployment rate. How are people who are so discouraged and long-term unemployed doing? These are the issues that are becoming part of the cost to the budget regardless of whether you a have stimulus or not. It really underscores that no matter how you cut it, it costs revenues when you have a recession. The other subplot is the chronically unemployed. It's a big deal," she said.

Swonk said the "shadow" unemployment rate — including the underemployed and people who no longer look for jobs — is about 16 or 17 percent.

While manufacturing job losses may show some signs of abating, previously strong areas like health care and education should show reductions. "A lot of hospitals are cutting back. They're cutting back on administration," she said.

One sector that may see a pickup sooner than others is small business. If you look at statistics provided by the National Federation of Independent Business, which represents small business, it sees the unemployment rate lower by October, at 9.1 percent. This contrasts with the expectation of most Wall Street economists, who believe the unemployment rate will continue to climb and peaks at double digit levels some time between late this year to mid next year.

William Dunkelberg, an economist for the group, reports that small businesses were still shedding jobs in July — with 24 percent surveyed reducing employment by 4.1 workers.

"I looked at the July numbers and by industry and by region, everything was flat to down...As far as job creation, we need the consumer to come back," he said.

In the next three months, the NFIB's survey shows that 14 percent of the businesses plan to reduce employment, while 9 percent plan to create new jobs. Owners are also cutting compensation as well.

The NFIB's forecast tends to forecast the actual unemployment rate fairly well, if you look at a chart. Dunkelberg said it went off course once, during the recession of the early 1980s.

"Fortunately we don't have a lot of recessions to look at. I think it probably squares up with me okay because we're not firing as many people ... that could bring the unemployment rate down. It's still very high, " he said. "If we quit firing people, the unemployment rate will come down. Even in the best of times of 4.5 percent unemployment — there are 350,000 people every week filing for unemployment claims."

Dunkelberg also said the summer is a slow season for hiring and fall hiring doesn't show up until August and September.

Stocks traded in a narrow range Thursday, in subdued trading ahead of the jobs report. The Dow as down 24 at 9256, while the S&P 500 was down 5 at 997, its first close below 1,000 since last Friday. The worst performers were defensive telecom, down 1.2 percent and health care, off 1 percent. Industrials were the best performer, up 0.6 percent.

Bonds drifted in slow trading. "If you look at the 10-year, they were sharply unchanged," said O'Donnell.

The 10-year was trading 3.76 percent. The dollar was slightly higher and commodities were mostly lower.

Besides the 8:30 employment report, other data includes consumer credit at 3 p.m. AIG reports earnings Friday. The stock has moved sharply higher this week, in what traders describe as a short squeeze.

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