Friday, September 5, 2008

A Bad Jobs Number?

The headlines tomorrow will read that the unemployment rate "jumped" to 6.1 percent from 5.7 percent. The headlines will also read that it is the worst unemployment rate since 2003 when the full effects of the 2000 recession and 9/11 were being seen (See Full Story).

To me, I am a little perplexed by this dramatic jump in the unemployment rate. Simply looking at the jobless claims numbers, this 6.1% unemployment number seems illogical. Unemployment insurance claims or jobless claims had fallen for 3 consecutive weeks; followed by a jump, yesterday, of 15,000 new filings for unemployment compensation (See Full Story). Yesterday's number was clearly expected (apparently, only by me) because it followed Labor Day and the official end of the summer and the beginning of the school year. A high number of summer jobs losses were expected to have shown up in that report as amusement parks, summer camps, beach operations, and other summertime-related businesses either shutdown completely or pared back staffing levels for weekend-only operations. Actually, I would have thought the jump in claims to be bit higher; probably 20,000 or more. But that fact was probably muted by an economy that had seemed (until this morning) relatively strong. In fact, just last week the Gross Domestic Production (GDP) had to be revised upwards from a previous reading 1.9 percent to 3.3 percent in the face of the export strength in our economy.

Certainly, the Unemployment Report takes into consideration more than those who lost their jobs and have filed for unemployment insurance. The Unemployment Report tries to discern how many part-timers and transient farm workers have lost their jobs as well as full-timers who did not work long enough to qualify for unemployment insurance. Further, it also tries to determine how many self-employed (never eligible for unemployment insurance) consider themselves out of work. It does this through a mechanism called the "Household Survey" and an associated form of statistical methodology. This part of the Unemployment Report is always the weak link and is subject to revisions later on. That's why I think that the "Household Survey" may have got it wrong and, further, I think the unemployment rate will be adjusted backwards to 6 or 5.9 percent when the report comes out in October. But, as usual, I could be wrong.

If the 6.1 percent unemployment holds and even goes higher in October, I think we could seriously believe that economy is either in or extremely close to being in a recession. My guess is that the late October, when the 3rd Quarter GDP is released, it will, again, be positive. But, the Fourth Quarter will, as I have said before, reflect an economic contraction. This will be the first of two contractions that will ultimately signal a recession. Whoever is in the Presidential office at that time will find themselves with and an economy that is both inflationary and having a constrained credit system that is seriously hampering growth. I personally don't think that any amount of government stimulus checks or tax rebates will help a economy in that condition. The only place that a stimulus check will go is to pay off higher and higher bills for energy and gasoline; as well as for rising food and clothing expenses. In other words, the essentials. Those checks will not go into buying the non-essential items that are needed to grow this economy and get us out of a recession.

As I have always said, we need to lower prices for products by reducing taxes on our businesses. With lower price, American products can be more competitive and attractive to consumers. Lowering the tax rate on the consumer will only help the consumer keep pace with inflation and not really address the inflationary effect of high business taxes; which is a core reason for product pricing and inflation. To keep jobs in this country, we need to make American products more competitive than those from other countries like Japan, Indonesia, India and China. Raising taxes on American businesses isn't going to make that happen. This is why Mr. Obama's plan is all wet in the face of a faltering economy. Lowering taxes on the American consumer (the taxpayer) is Ok as a welfare program to keep pace with inflation but does nothing to make our products cheaper and more attractive to the conumer. Raising taxes on business, will just add to inflation and price our products higher than our foreign competitors. We want our businesses to have more available cash (not eaten up in taxes) to expand and buy new equipment and services. This is only logic and not some kind of political gamesmanship.

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