On the surface, it looks like the headline U.S job numbers made Wall Street happy today, as the American economy created 163,000 jobs when economists were expecting 100,000 jobs for the month of July. (Source: Bureau of Labor Statistics, August 3, 2012.)
The good news is that this was the highest showing of job numbers in five months. The bad news is that more people gave up looking for work, as the unemployment rate rose slightly from 8.2% to 8.3%.
The job numbers for the months of May and June were adjusted lower to reveal that there were 6,000 fewer jobs created than first reported, which of course did not help the unemployment rate.
But digging deep within the July job numbers, I see the Bureau of Labor Statistics states that the expected 13,000 seasonal layoffs in the automobile industry did not occur in July, which it believes is a temporary situation. What this means, dear reader, is that the job numbers were skewed higher by 13,000 jobs because the Bureau of Labor Statistics expects these layoffs to occur in the not-too-distant future.
In addition, temporary work, and hiring in the food services and drinking places—the low-paying jobs—accounted for almost 29% of the job numbers gain seen in the month of July.
In light of the fact that many of the job numbers created over the last year were in low-paying sectors of the economy, year-over-year average hourly earnings were flat when compared to the month of June.
Over the last year to July, average hourly earnings are only up 1.7%. When inflation is taken into account that 1.7% gain in wages is completely wiped out.
This is the most startling number in the report we received this morning from the Bureau of Labor Statistics…something the media is not focusing on: the number of people not counted within the labor force increased again to its second-highest reading ever recorded. This means 86.8 million people were not included within the job numbers.
The number of people considered long-term unemployed—jobless for at least 27 weeks—was unchanged, at 5.2 million. As a result of no improvement in these measures within the job numbers, the U6 unemployment rate increased.
U6, as reported by the Bureau of Labor Statistics, is a broader measure of the unemployment rate, because it takes into account discouraged people who are still looking for work, as well as those working part-time who want full-time work. The U6 unemployment rate rose to 15.0% in July from June’s 14.9%.
For the U.S. economy to show any improvement, the U6 unemployment rate within the job numbers must improve, but instead has been deteriorating steadily since February of this year.
The labor participation rate measures all people in the working age population (from ages 16-64) who are actually employed. In April, this rate fell to its lowest level since December 1981: 63.6%. This is a reflection of fewer and fewer people participating in the labor force, because there are no jobs to be had. In May and June, this measure held steady at 63.8%, but in July it fell slightly to 63.7%. It is dangerously close to challenging its record worst levels!
Despite the headline, the job numbers continue to highlight a weak U.S. economy. The unemployment rate has now been above 8.0% for more than three years, which is the longest stretch of the unemployment rate above 8.0% since the Great Depression. (Source: Reuters, August 3, 2012.) That rally in stocks today…I believe it has more to do with traders bidding up the market than the job numbers report.
It gets worse, dear reader, because U.S. corporate revenue earnings are deteriorating fast, which I’ll be writing about on Monday. If corporate America’s revenue continues to fall, who is going to create the jobs to improve upon the job numbers?
Talk of financial crisis is intensifying in the European Union, as interest rates in Spain and Italy remain at elevated levels and threaten to rise even further. This makes it almost impossible for both countries to go to the market to roll their debt over…unless it’s at impossibly high interest rates, which neither country can afford to pay.
The only reason interest rates have remained somewhat steady recently is that Mario Draghi, President of the European Central Bank (ECB), said the European Union was ready to stand behind Spain and Italy.
This means outright money printing or quantitative easing. But one big objection: Germany continues to insist that Draghi is overstepping his bounds in making such comments and that quantitative easing is not part of the ECB’s mandate and cannot be part of the European Union’s mandate unless all countries agree, including the European Union’s most important member, of course: Germany.
This coming September 12, the German Constitutional Court will rule on the 500-billion-euro European Stability Mechanism (ESM) the European Union is proposing. If Germany does not approve this package, the European Union will be finished, because Spain and Greece will simply run out of money. If Germany does approve the ESM, the European Union is stuck with the same problem: 500 billion euros is not enough to cover the obligations of Greece, Spain, and Italy. (Also see: “Proposed Bailout Money Not Enough: Credit Crisis in Spain Deteriorates.”)
A European Union official within Spain is saying—unofficially—that the country needs 300 billion euros in bailout funds! (Source: Reuters, July 29, 2012.)
What this will require is quantitative easing from the ECB. As unemployment in Spain reaches a record high of 24.6%, there are public calls from provincial government officials to leave the European Union. (Source: Telegraph, July 30, 2012.)
The head of Spain’s Freemarket Corporate Intelligence and a prominent economist within Spain, Lorenzo Bernaldo de Quiros, has written an article in Spain’s second-largest newspaper in which he states that Spain will be insolvent later this year. He says it is not an issue of “if it will happen” but “when it will happen.”
His argument is that Spain will need to restructure its debt, but if it does so under the European Union, it will face austerity and a continued decline in economic growth like Greece. He feels the best route is for Spain to restructure its debts and go about it alone, because then it can chart its own course and give itself the best chance to come out of this depression it is in.
One thing is for sure; the current path is unsustainable.
As I’ve been writing in these pages all along, dear reader, a bailout of 100 billion euros for Spain is not sufficient. Quantitative easing is the only thing that will keep the European Union together, at least temporarily, in the hopes that economic growth can resume relatively soon. Without quantitative easing, interest rates in both Spain and Italy will continue to rise dramatically, making the rollover of debt almost impossible.
Watch out for that U.S. stock market; if the European Union refuses to embark on a round of quantitative easing, it will cause a crisis that will send shockwaves around the world.
Where the Market Stands; Where it’s Headed:
We’re definitely not off to a good start for the stock market in August. The Dow Jones Industrial Average has been down four of the last four trading sessions.
That bear market rally that started in March of 2009; if the Federal Reserve doesn’t offer some more liquidity soon, it will be over.
(I’ll have a very important editorial on Monday. Looks like revenue growth for the S&P 500 companies is now at its lowest level since the credit crisis hit in 2008! Please watch for this important story Monday.)
What He Said:
“I’m getting very worried about the state of the U.S. housing market and its ramifications on the economy. The U.S. could be headed for its first outright annual decline in home prices on record, adjusted for inflation. And I really believe this could be a catastrophe for the U.S. economy.” Michael Lombardi in Profit Confidential, August 2, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.