U.S. Unemployment & What Happens Next

Every month on about the 7th or so the Bureau of Labor Statistics {BLS} releases it's unemployment report. For economists and politicians, this is probably the most watched of all economic reports. We as a nation need to create about 175,000 per month to keep up with the natural population increase. Last month's report, which was for May, was expected to show an increase of about 150,000 - 170,000 jobs gained. It came in at only 54,000. It was ugly. The political spinmeisters told us that the supply chain disruptions caused by the Fukushima earthquake was the primary cause-- and there was some truth in this. Most wrote this off as a one time stumble; the stock market continued on it's merry way upwards. I myself did'nt make a lot of noise about this here on the blog.

So when the 7th of this month approached, most financial analysts were expecting an increase of about 120,00 jobs in the report, which was for June. Some optimists were whispering numbers like 160,000; the pessimists were talking about 90,000. The report came in at a gain of only 18,000 jobs-- an unmitigated disaster. Worse, the report from last month showing 54,000 was revised downwards to 25,000. It was so bad that President Obama felt it necessary to treat us to a teleprompter news conference, where he reminded us that since he took over there had been over 2 million jobs created. He gave no explanation, but did suggest that raising the debt limit would be helpful as he said it was creating a lot of uncertainty. He understands that if this ship does'nt turn around quickly, his chances of being re-elected are slim and none, and he's right.

There are lots of opinions here as to what's going on. Mine is that a number of factors are at work here. First and foremost is that our economy is largely built on consumer spending, and that with over ten million unemployed or underemployed people, our consumer driven economy simply can't grow. The debt levels of most people who are working is another big factor. Some smaller ones included the price of gas in June, which ensures that those who are actually inclined to spend have less money to do it. Another is that millions of people are beginning to run out of unemployment benefits, thus further hamstringing a consumer driven economy. I fully believe that what recovery we were going to have is now done and gone due to the above listed factors. It seems that borrowing trillions of dollars has not helped. As more and more people lose their unemployment checks and the economy stalls, the chances of some miraculous recovery is fading fast. I'm actually stunned by the numbers; I was expecting a much slower slowdown. It gets better; QE2 ended last month, and because of this there will be less money circulating in the economy when this next report is due.

So the question becomes-- what now ? In Washington, the next big event is the Debt Limit talks between Democrats and Republicans which I alluded to in last week's post. The "drop dead" date-- ie the day when the US Government can no longer borrow money-- is August 2nd. It seems that both sides have been moving towards a deal. Obama's spokesman last week came out and said that Democrats may agree to slow the rate at which Social Security and Medicare grow. Repubs came out and said they might see their way to closing some "tax loopholes". There is a big meeting tomorrow at the White House on this. The problem is, the BLS unemployment report just threw another dynamic into the equation. For the Obama Administration, they need to somehow not piss off seniors by cutting Social Security or Medicare and they need to somehow get the economy moving forward. If they fail at either of these twin goals, Obama will lose the election. This puts the Democrats in a very weak position for this weekend's talks, which are aimed at reducing the amount of money the US Government has to borrow each month to meet it's obligations.

Here's one solution: if there's anything Republicans love, it's a tax cut. It's also one of the fastest ways to put money into the hands of working folk. I can see Obama making a play to cut the taxes of low and middle income people. He's already done it once: there was a 2% reduction in the FICA tax employees pay, which is actually scheduled to end here rather soon. Not only can they extend this tax cut, but in a desperate gamble to create jobs, double down on this by expanding it to 4%. The tax that employers pay to FICA might also see a cut.

The problem you ask ? This would cut back on the tax income the US Government takes in every month, with the result being that the government will need to borrow even more money each month to meet it's expenses. The concept of this whole Debt Limit farce was to limit the amount the government has to borrow. If these tax cuts go thru, I look for the government to be borrowing close to 50 cents out of each dollar it spends. It's already at 42 cents for every dollar spent as we speak. Oh yes-- and since foreign nations are no longer really loaning us money, we're going to have to print it up. There is a chance that the interest rates the markets charge the US Government to borrow shoot up sharply because the markets will (rightly) see this as complete madness. It might also lead to QE3 being announced by Ben Bernanke because of some ugly calls from the Obama Administration. $5.29/gal gasoline anybody ?

You tell me-- how long can anybody spend twice their monthly income and pass those debts onto their children ? If this tax cut is passed, this is what the US Government will be doing. Complete insanity. This is no way to run a country, folks. Our Founding Fathers are spinning in their graves. An ugly fate awaits us all for this tragi-comedy..

update Saturday 6pm: "Senator Charles Schumer of New York, the chamber’s third-ranking Democrat, called for an “immediate jolt” to the economy by extending and enlarging a one-year payroll-tax cut that’s set to expire Dec. 31. He asked for action “as quickly as possible by including it in the final debt-limit agreement.” 
update Sunday 11am: It appears that Italy might be in trouble. More to the point, a couple of their biggest banks look to be in serious trouble-- the stocks of UniCredit, Italy's largest bank, collapsed on Friday and trading was halted on their stock. A few other Italian banks also fell of the cliff. I did'nt mention this as I thought this was going to be "handled". Their Finance Minister Tremonti also is involved in some sort of scandal. It appears the EU/ECB has scheduled an emergency meeting tomorrow to deal with Italy. An Italian collapse would catastrophic. Here's the Reuters link: http://www.reuters.com/article/2011/07/10/us-eurozone-idUSTRE7691HM20110710