Friday, July 3, 2009

The Ripple Effect Of High Unemployment Going Higher

Yesterday's jobs report clearly showed that this recession still has the legs to continue on for a long time to come (See Full Story). Before yesterday's numbers were announced, all those "green shoots" proponents that thought this economy was about to turn around had said that the number of jobs being lost for the month of June would only amount to about 363,000; with an unemployment rate of 9.6%. Well, the number of jobs being lost last month was much worse than expected with 467,000 workers becoming unemployed in June. Further, May's previously bad numbers were also adjusted upwards from the prior month's report with the addition of another 15,000 workers hitting the streets. However, the somewhat perplexing part of yesterday's unemployment report was the fact that, despite a worst-case number, the unemployment rate only went up by one-tenth of one percent to 9.5%.

Anyway, the Friday's Stock Market looked at those numbers and reflected backwards on some other pretty sour numbers over the last two weeks and sold off by 223 points on the Dow Jones Industrial Average. That sell off to me, as a practicing stock market technician, seems to indicate that we are well on our way to a retesting of the multi-year market lows of 6470 that were seen in just March of this year. That means that the stock market rally, for the mean time, is probably over. If we do go down to 6500 or below on the "Dow", that will be a loss of about 1800 points from where we are right now. The stock market is, in effect, saying that the recession is far from being over. This is especially true if you believe in the old adage that the stock market has a track record of predicting changes in the economic conditions of this country that are at least 9 months ahead of time. If that is the case, it means that we probably won't see a recovery until at least the second quarter of next year; depending on whether or not the stock market stops falling below 6500. That also means that we probably won't see the economic recovery in this quarter that Team Obama had predicted only 4 months ago and has consistently repeated; even as of last week. But, then, they also said that if he Stimulus Package wasn't passed, unemployment would go above 8% this year. With unemployment now a 9.5% percent, that says a lot about their "economics" prowess and their ability to give this country true economic direction and stability.

Normally, you could say that, in economic terms, unemployment is a lagging indicator and that the economy will have turned around long before the unemployment rate starts to improve again. However, for that to be a reality, it is essential that unemployment stabilizes and doesn't just keep rising. Yesterday's report shows that unemployment is still on the rise. Before anyone can be comfortable about the direction of this economy, we need to see a few months where the unemployment rate remains somewhat constant or even starts falling. Only, then, can the it be said to be truly a lagging indicator. But, this continued rise in the unemployment rate makes unemployment reporting a real-time, and not lagging, indicator. And, that fact should worry everyone.

The problem with high, going higher unemployment levels is that it has a ripple effect on the economy.

Every time a person loses their job, that is one less person who will be paying any state and/or federal income taxes. Sales tax revenues will also suffer as that idle worker cuts back on their non-essential spending. In fact, almost every newly unemployed person will then become eligible for unemployment insurance and will start feeding off the State's coffers instead of contributing to them in the form of taxes. As the number of the unemployed grows, then, too, does the State's deficits as tax revenues decrease. Eventually, as the unemployment rate rises to another new tipping point, the State legislatures must raise taxes or let people go to compensate for the substantial loss in tax revenues. When a state is forced to raise its taxes, most everyone loses some part of their disposable income. That loss of disposable income will ultimately result in less money being spent to buy the things that would normally fuel the economy. Then, too, more people will begin losing their jobs. And, unless that cycle is broken, it can just keep going on forever. That's why tax increases are so punitive and so destructive to any economy.

Furthermore, every unemployed worker will impact the economy by buying less of almost everything that is outside of their need for food staples and other essential living expenses. That means that, as unemployment rises, businesses will continue to lose business. That, then, results in more workers being laid off and, again, less tax revenues. And, so the cycle of more jobs being lost continues.

Another consequence of higher and higher unemployment is greater losses of home values. From studies, we know that about 45 percent of those mortgages that fall into foreclosure are a direct result of employment. So, as unemployment continues to rise, so will the house foreclosure rates continue to rise. Bankruptcy rates will also go up. As the foreclosure rates rise, the value of homes will continue to fall. This has a psychological impact on the consumer and the consumer will continue to pull back and save rather than spend. Again, as consumer spending retracts, unemployment rates rise as businesses are once again forced to let people go in order to adjust to lower sales. Some marginal businesses will just fold and go out of business completely. As before, State tax revenues will again fall and, ultimately, taxes will have to be raised and some number of government workers will have to be let go.

In essence, every job that is lost has a serious ripple effect on the economy. The Obama Stimulus Package was supposed to break this cycle. But, to do so, it should have impacted this economy on an immediate basis so that the spiral of unemployment was, at the very least, slowed. Sadly, this $787 billion Stimulus Package was really only slated, from its inception, to spending 20% of its funds to create any jobs. The rest was purely for social engineering programs. Worse yet, most of that funding was actually backloaded to be spent next year with only limited spending this year; when it was truly needed. Also, the actual spending has be extremely slow. Only about 10 percent of the Stimulus Package money has even been applied to this economy as most of those so-called shovel-ready jobs have been languishing in the mud of state and federal bureaucracies, mismanagement, and political-payback stupidity. Subsequently, every day that goes by, this economy becomes even more broken. As a result, the impact of any stimulus money becomes less and less effective. It truly is a situation where you either pay me a little now or pay me big-time later on. Think of it like a cavity in a tooth. If that cavity is taken care of when it's small, the cost to fill it will be relatively inexpensive. Allow it to expand to where a "cap" is needed or to where that tooth becomes abscessed and it will cost thousands to repair.

Lastly, there was one other very disturbing and important number in yesterday's jobs report. This was that the average number of hours, in a worker's week, had fallen once again. This time, the average work week fell to 33 hours. This means two things. Hourly employees are working less and, subsequently, getting less pay. It also means that full time jobs are being filled by part-time workers. Both of these facts mean that less consumer spending is flowing into the economy and there is an increasingly smaller tax base for the Federal and State governments.

This economy should have been immediately shored up back in January when the unemployment was only 7.6%. Now, at 9.5% and well on its way to at least 10%, it is becoming apparent that this economy is more like a tooth abscessing and becoming a lot more costly to fix. That means the the cost to turn this economy around is going up by the day and that is why you are now hearing a chorus of calls for a second stimulus package. But, the real fix for the economy is to shut down the current useless waste of unspent Stimulus monies and create a new package that is more broadly targeted to get this economy back on track. Let's stop the political payback to the Teacher's unions and the other unions like the Police and Firefighters and focus on the broader issues of getting the larger base of non-union workers back to work (See the Video of Obama's equivalent of Bush's "Mission Accomplished" statement that was said at his Town Hall Meeting of this week. He seems to think the Stimulus Package has done its job!)

Only when federal money is actually targeted to stem the rising rate of foreclosures will consumer sentiment rise and consumer spending resume. We need bigger tax breaks than the $13 a week that this current Stimulus package gives the consumer to stop saving and start spending. We need to stop Adjustable Rate Mortgages (ARMs) from letting their rates keep adjusting upwards so that the rate of foreclosure stops rising. The existing toxic assets like those worthless Credit Default Swaps need to be taken off the Bank's books so that our banks stop failing and stop having to be taken over the FDIC.

All the problems that existed before the passage of Obama's Stimulus Package still exist and still aren't really being addressed. What's worse, we now have states, lead by California, that are seriously close to bankruptcy. Protecting policemen, firemen, and teachers is useless if a state has to shutdown most of its fire, police stations, and schools because it can no longer pay its bills. Would someone please tell Obama that!

Not one person on Obama's economic team has ever really created a job; and, it shows! We need business leaders to come together to formulate a true plan of action. We don't need a bunch of liberal, former-lawyers who are now ideological Democrats in the House and the Senate to spend billions so that they can guarantee getting votes in the next election by paying off those groups who got them elected in this last one. If this economy keeps tanking, all that money being spent on political pay-back will only be wasted when all those Democrats, who voted for this failed Stimulus Bill, are thrown out of office.

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