The US Federal Reserve faces an intractable problem of unemployment. Non-farm
payroll employment in the United States continued to decline in July 2009, with
the loss of 247,000 jobs, and the unemployment rate was little changed at 9.4%
for the second consecutive month, the US Bureau of Labor Statistics reported in
August.
The average monthly job loss for May through July was 331,000 jobs, about half
the average decline for November 2008 through April 2009, which lost 645,000
per month. Employment decreased
by 117,000 a month on average during that period.
In July, 2009 job losses continued in many of the major industry sectors,
pushing the number of unemployed persons to 14.5 million.
Employment in construction declined by 76,000 in July 2009, about in line with
the average of 73,000 for the past three months. Employment had decreased at a
higher rate, by 117,000 a month on average from November 2008 to April 2009.
Manufacturing employment fell by 52,000 in July 2009 and has declined by 2
million since the recession began. In motor vehicles and auto parts, fewer
workers than usual were laid off in July for seasonal retooling. As a result,
the estimate of employment for the industry rose by 28,000 after seasonal
adjustment. In large part, July's seasonally adjusted increase reflects the
fact that previous job cuts had been so extensive that there were fewer workers
to lay off during the seasonal shutdown. Elsewhere in manufacturing, several
industries continued to lose jobs in July, including machinery (-15,000) and
fabricated metal products (-14,000).
In July 2009, retail trade employment declined by 44,000. Job losses in the
industry had averaged 27,000 per month over the prior three months. Employment
in wholesale trade fell by 19,000 in July, with the majority of the decline
occurring among durable goods wholesalers.
Employment in professional and business services continued to trend down in
July, losing 38,000 jobs. The industry has shed 1.5 million jobs since the
start of the recession. Within professional and business services, employment
in the temporary help industry edged down in July. While temporary help has
lost 844,000 jobs since the recession began, the declines have lessened
substantially over the past three months.
Transportation and warehousing lost 22,000 jobs in July. Since May, the average
monthly job loss was half the average monthly decline for November through
April (-17,000 versus -34,000).
Financial activities employment continued on a downward trend in July
(-13,000). The average monthly decline for this industry was 23,000 over the
past three months compared with 46,000 per month from November through April.
Since the start of the recession, the financial activities industry has lost
501,000 jobs. Employment in the information sector declined by 16,000 jobs in
July, which included job losses in publishing and telecommunications.
Healthcare employment increased by 20,000 in July, about in line with the
average monthly gain for the first half of this year but down from an average
monthly increase of 30,000 during 2008. Employment in leisure and hospitality
has been little changed over the past three months.
Among the major worker groups, unemployment rates in July 2009 for adult men
was 9.8%, adult women 7.5%, teenagers 23.8%, whites 8.6%, blacks 14.5%, and
Hispanics 12.3% and for Asians 8.3%, not seasonally adjusted.
The number of long-term unemployed (those jobless for 27 weeks or more) rose by
584,000 over the month to 5.0 million. In July, 2009, one in three unemployed
persons were jobless for 27 weeks or more.
The civilian labor force participation rate declined by 0.2 percentage point in
July 2009 to only 65.5%. The employment-population ratio, at 59.4%, was little
changed over the month but has declined by 3.3 percentage points since the
recession officially began in December 2007.
The number of persons working part time for economic reasons (referred to as
involuntary part-time workers) was little changed in July 2009 at 8.8 million.
The number of such workers rose sharply in the fall and winter of 2008 but has
been little changed for four consecutive months.
About 2.3 million persons were marginally attached to the labor force in July,
709,000 more than a year earlier, not seasonally adjusted. These individuals,
who were not in the labor force, wanted and were available for work and had
looked for a job sometime in the prior 12 months. They were not counted as
unemployed because they had not searched for work in the four weeks preceding
the survey.
Among the marginally attached, there were 796,000 discouraged workers in July,
up by 335,000 over the past 12 months, not seasonally adjusted. Discouraged
workers are persons not currently looking for work because they believe no jobs
are available for them.
The other 1.5 million persons marginally attached to the labor force in July
2009 had not searched for work in the four weeks preceding the survey for
reasons such as school attendance or family responsibilities.
In July 2009, the average workweek of production and non-supervisory workers on
private non-farm payrolls edged up by 0.1 hour to 33.1 hours. The manufacturing
workweek increased by 0.3 hour to 39.8 hours. Factory overtime was unchanged at
2.9 hours.
In July 2009, average hourly earnings of production and non-supervisory workers
on private non-farm payrolls rose by measly 3 cents, or 0.2%, to $18.56. Over
the past 12 months, average hourly earnings have increased by 2.5%, while
average weekly earnings have risen by only 1.0% due to declines in the average
workweek.
The change in total non-farm payroll employment for May 2009 was revised from
-322,000 to -303,000, and the change for June was revised from -467,000 to
-443,000.
Gross domestic product (GDP) was revised further down to falling 6.3% to $14.2
trillion in 2008. This is the worst slowdown since Q1 1982, when GDP fell 6.4%
Loss of household wealth
Fed data show US households suffered a record 9% drop in wealth. Households
pared debt in the fourth quarter of 2008 as a deepening recession battered
confidence and finances. Household net worth dropped by $5.1 trillion from the
prior quarter to $51.5 trillion. For the full year, net worth dropped by $11.2
trillion, reflecting steep price declines in the housing and stock markets.
The declines in household net worth were the largest since quarterly and annual
records began in 1951 and 1946, respectively, according to Fed data. Since a
second-quarter 2007 peak of $64.4 trillion, household wealth has dropped by
about 20%, effectively wiping out four years of gains. That would not be half
as bad if the quadruple of house prices during the bubble boom had not been
largely finance by debt. With less than 10% equity in their prime residence,
households losing 20% of their net worth would be 10% under water. For those
who bought with zero down payments, the 40% drop in home prices has put them in
bankruptcy territory with negative net worth. That has put a chill on consumer
spending and added to Americans' anxiety about their economic well-being.
In the second quarter of 2007, when household wealth peaked, the savings rate
was a low 0.3%. In the fourth quarter of 2008, household saving reached 3.2%.
The percentage is expected to at least double in the next couple of years as
households reduce consumption to pay down debt.
A swift increase in such synthetic savings in the midst of a recession can
worsen the downturn. Consumer spending accounts for more than two-thirds of US
economic output of $14 trillion. Between 2000 and 2007, US households nearly
doubled their outstanding debt to $13.8 trillion - an unprecedented amount in
both nominal terms and as a ratio of liabilities to disposable income (138%).
For every dollar of consumer debt reduction, 66 cents will be cut from the GDP.
The negative wealth effect
The Fed's quarterly Flow of Funds report showed household borrowing shrinking
at a 2% annual rate in the fourth quarter of 2008 after increasing at a 0.2%
pace in the previous period, for the first quarterly decline on record. Home
mortgage debt fell at a 1.6% pace - the third consecutive quarter of declines -
and consumer credit dropped at a 3.2% rate.
The build-up in household debt was one of the most striking elements of the
five-year housing boom, which peaked in 2006. Consumers recorded double-digit
annual increases in mortgage debt from 2001 through 2006, some of that in the
form of cash-out refinancing that helped fuel strong consumer spending in a
bubble economy.
Just how much rising wealth contributed to consumer spending is a subject of
much debate but it is thought to be somewhere around 5 cents on the dollar. But
the boost of the wealth effect on consumer spending comes in spurts as
monetization of wealth comes from erratic home equity loans by home owners and
periodic property flips by speculators. The proceeds tend to be spent on
big-ticket items, such as a new car, home remodeling, adding a vacation home,
paying for children's education or family vacations.
It is less clear how much households will cut back now that their wealth has
been greatly reduced or depleted to negative net worth and unemployment and
underemployment are rising. The effect can be expected to be exponential since
the "saving" is merely going to extinguish a small portion of outstanding
mortgage and consumer debt. Stopping spending of debt proceeds is not saving.
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