The Hindu Business Line : US: Unemployment blues

The first Friday every month is turning out to be a nightmare for the US markets and, indeed, for global markets as well. That is when the Bureau of Labour and Statistics (BLS) releases the US employment situation report, which details the latest non-farm payroll numbers. The information never fails to catalyse the markets (either way!). Non-farm payroll counts the number of paid employees working part-time or full-time in US business and Government establishments.

The news released last Friday was bleak, to put it mildly. The US economy shed another 651,000 jobs in February. That is the third consecutive month when job losses have exceeded the 600,000 mark. What is worse, the rate of unemployment in the US is rising faster than expected. The official unemployment rate in February shot up to a 25-year high of 8.1 per cent, against 7.6 per cent a month ago. Economists predict that the unemployment rate will soar to 10 per cent by the end of the year.

Real rate

But a closer look at the recent numbers suggests that the real unemployment rate is actually already close to a shocking 15 per cent. The official numbers only count people who have actively looked for a job in the past month as part of the labour force.

But when a recession has dragged on for more than a year as this one has, there can be a large number of discouraged workers who have simply stopped looking for jobs. These workers are not counted in the official estimate. Then there are workers who want full-time jobs, but are forced to take up part-time positions out of economic necessity. They are considered employed by the BLS but technically are in the market for full-time work. These groups are included in a separate estimate by the BLS. According to this calculation, the broader unemployment rate is actually at 14.8 per cent.

Further numbers released earlier this week also hinted at a worsening job market. The number of job openings in January was at 3 million, a full 35 per cent lower than September 2007, when the downtrend began. People’s ability or willingness to switch jobs is understandably at a new low point, as measured by the Quits rate. The average hours worked has been displaying a flat trend. However, anecdotal instances of factory shutdowns and pay-cuts are bound to damage consumer confidence, even if they feel their jobs are relatively safe. This has obvious negative repercussions for consumer spending. The jobs data also holds unnerving information for foreign workers on temporary visas in the US. There is political pressure on companies to reduce hiring of H1B workers and this is not limited to companies that have received Government bailout money.

Indian and Chinese MBA graduates have been refused jobs on these grounds, according to media reports. A higher unemployment rate may also spark off more protectionist calls for restricting outsourcing, with implications for thousands in India.

What’s ahead?

The poor numbers are beginning to spark off debate in the US on whether the recession could deepen into a depression. If the stimulus package does not succeed in creating 3.5 million jobs (even that may not be enough), and the unemployment rate persists over a prolonged period of, say, two years or more, some economists say the US could be facing a depression, a term not used since the 1930s. However, a depression is recognised only in hindsight and the debate as of now, seems to be focused on semantics or word-play. Instead, it might help investors to remember that unemployment rates are lagging indicators. This means they can continue to climb long after the recession ends.

The reason being, once job prospects improve, many previously discouraged workers begin to return to the labour force, thus increasing the demand for jobs and the unemployment rate shoots up temporarily before flagging. On the other hand, looking at the payroll additions might help in figuring out when the worst is over. History suggests that an addition of over 250,000 can be expected in the early stages of a recovery. Fingers crossed on that!

(The author is a New York-based freelance writer.)