Unemployment: First Signs of Improvement?

From Smart Money |July 2, 2010

The national unemployment rate fell to its
lowest level so far this year at 9.5% for the month of June, according
to the Bureau of Labor Statistics (BLS) report released today. That's
lower than 9.8%, which economists polled by Briefing.com had expected
and an improvement from the 9.7% unemployment rate in May. Today's
report shows one of the first signs of a possible improvement in the job
market with the decreasing unemployment rate being in part a result of a
pickup in private sector employment.

So far this year, the private
sector has hired an additional 593,000 employees -- although it's still
7.9 million workers below its December 2007 level, according to the BLS.
Still, the job market is likely to face many hurdles before returning
to its pre-recession levels. The Congressional Budget Office is
projecting that the average annual unemployment rate won’t drop to
pre-recession levels of 5% until 2016; in its June 2010 report, it
projects unemployment at 9.5% for 2011, 8% for 2012 and 6.3% in 2013
before it begins to stabilize at around 5%. “The numbers are scary, and
they reflect the fact that we are technically in a recovery – it’s just
that the recovery is so slow we won’t be able to move the dial on
unemployment” for some time, says Heidi Shierholz, an economist at the
Economic Policy Institute (EPI), a nonpartisan think tank.

So far this year, state and local governments have
been the top job-cutting industry mostly because of their budget cuts.
Two developments during the past couple of months – European debt woes
and the expiration of extended unemployment insurance benefits – are
likely to keep unemployment high as well. “European austerity will
affect us,” says Shierholz. “When they pull back on spending, their
economies will grow more slowly and they will be demanding fewer goods,
which hurts our exports, our growth and employment growth.” Eliminating
unemployment insurance extensions could also stunt job growth. By the
end of this week, around 1.3 million workers will have exhausted their
benefits, according to the EPI. This money, which is given to the
long-term unemployed, rarely goes into savings – instead it’s typically
used for basic necessities, like rent and food, which help create or
keep jobs. The House passed a measure to reauthorize the extensions, but
the Senate has yet to do so.

Unemployment
claims may also be an indicator of where the stock market is heading.
Weekly initial claims have been rising since May and should they hit
500,000, that "would heighten ‘double-dip’ fears and keep vulnerability
to any perceived Armageddon fears at a fever pitch,” wrote James
Paulsen, chief investment strategist at Wells Capital Management, in a
report comparing the historical trends between the stock market and
unemployment claims. However, he adds that private sector company
profits – in the last year, profit per job has grown around 35% - should
lead to increased employment.

“We
continue to believe job creation is back and expect job conditions to
improve during the rest of the year,” wrote Paulsen. “Why, when labor is
more profitable than at almost any time in the last half century, would
companies suddenly stop creating jobs?”