Job Cuts at State and Municipal Levels Pick up Steam

Job CutsI have been arguing in these pages for months now that the continued contraction among states and municipalities in the U.S. would keep the unemployment rate high in this country.

The U.S. Bureau of Labor Statistics estimates that the government sector—that is municipal, state and federal governments—has cut 586,000 jobs since December 2008. If the same amount of people would be working in government today, the official U.S. unemployment rate would be 7.1% instead of 8.1% (Source: Wall Street Journal, June 25, 2012).

If the unemployment rate was 7.1% today, the Federal Reserve would be talking about how successful its policies have been, instead of being concerned that the U.S. economy continues to weaken.

The other disturbing trend is that the number of jobs the government sector has lost over the last six months is picking up steam and shows no signs of letting up. With large budget deficits, municipalities and states will continue to cut jobs to balance their budgets.

This trend of greater job losses presents another challenge to lawmakers in the White House. Yes, the job numbers continue to deteriorate in the government sector, but the focus cannot be on the unemployment rate in that particular sector.

The focus instead must be on the private sector. The only area left within the economy that can pick up the slack and hire these laid-off government workers is the private sector.

Unfortunately, the job numbers in the private sector continue to decline as well, making the unemployment rate even worse. And with an election not far off, the focus really is on campaigning, as opposed to dealing with the deteriorating economy.

The high unemployment rate among government workers should not come as a shock to anyone considering the terrible budget deficits many of these states and municipalities face (see: “Crisis at City and State Levels Reaches Danger Level”). What is shocking is that the high unemployment rate in the private sector continues to also deteriorate.

The U.S. economy will continue to slow unless the job numbers are created in the private sector—and I don’t see this happening anytime soon. It could be a long painful summer for the stock market, as the U.S. unemployment rate continues to disappoint and it becomes more apparent we are headed towards recession again.

Michael’s Personal Notes:

The idea of a global economic recession is beginning to hit mainstream media (albeit too late).

Fear is escalating that the global economic contraction is beginning to hit the U.S., possibly leading us into a recession. The only thing that could turn this tide is if the rest of the economic world began to grow again, easing the recessionary pressures within the U.S. economy. Unfortunately, the recession in Europe is worsening as China’s economic contraction continues to gain steam.

For May, China’s manufacturing sector contracted to a seven-month low (source: MarkIt Economics). Since China’s economy is based on manufacturing due to the goods it exports to the rest of the world, this is not a good sign for China. It also adds to the evidence for the global recession camp, as the rest of the world is not increasing their demand for goods.

Within China’s manufacturing report, the number of new orders and the number of new export orders is seen as a gauge of future demand. Order numbers contracted at a faster rate in May and are now at levels not seen since March 2009! China had better be careful or it may be talking about a recession!

As new orders are contracting at such a rapid rate, employment in the manufacturing sector of China is contracting as well. With the unemployment rate creeping higher in China, it will hold back consumer spending. This negative feedback loop is occurring around the world, adding to the evidence of a global economic recession.

While the financial crisis continues to escalate in Europe, the economic contraction and recession in most countries of the eurozone continue to accelerate. The eurozone’s manufacturing activity came in at a level not seen since June 2009! (Source: MarkIt Economics.)

Worse, the economic contraction that has been taking place over the last few months is gaining at the fastest level experienced in three years!

Except for January of this year, the index has contracted steadily for a year! There is further evidence that the recession is taking hold and won’t let go.

New orders for goods across Europe fell for 11 straight months, which naturally is putting pressure on jobs, adding to the recession woes and indicating that the economic contraction is not subsiding.

The only economy that is keeping the eurozone up is Germany. Also, for the financial crisis to have any kind of resolution, the eurozone is dependant on the actions of the German government. The problem is the people of Germany are going to be less likely to help if the economic contraction within Germany picks up steam.

Germany’s manufacturing and output index fell to the lowest level in three years and the pace of the decline is the fastest that the index has seen in those three years.

The prospect of a global economic recession can no longer be ignored now that the consensus is that the continued economic contraction taking place in many parts of the world has led us into a global economic slowdown. The stock market will be hard-pressed in this recessionary environment to make any gains, unless QE3 comes in to prop it up soon.

Where the Market Stands: Where it’s Headed:

The action in the stock market is unfolding just as I predicted. Investors are finally coming to terms with the global economic slowdown. Europe is exporting a recession to North America. China’s economy is slowing. It’s truly a global contraction in economic growth.

All we are waiting for now is for the Federal Reserve to announce its next round of quantitative easing (QE3), a fancy name for money printing. After the stock market reacts to the news, it will be time to throw in the towel for the bear market that started in March of 2009. (Also see: “Where the Stock Market Goes From Here.”)

What He Said:

“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: Borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in Profit Confidential, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.