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Jobs Outlook Isn't Just Bad, It May Be Getting Worse

An anticipated gradual gain in US employment has turned into a surprising deterioration, and that has economists worried about the increasing threat to the economic recovery.

Unemployment line
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Unemployment line

Thursday's weekly jobless claims reportwas just the latest but perhaps most definitive sign yet that if the economy is to recover, it will do without participation from the labor market.

Instead, the continued trend of businesses doing more with less likely will hold as jittery employers remain reluctant to start bringing workers back on board.

"We've had increases (in jobless claims) the last couple of weeks, when most of us thought they would be decreasing. The number of people claiming benefits is now disturbingly high," says David Resler, senior economist at Nomura Securities in New York. "For those who doubted it will be a long, drawn-out period, they can't doubt it anymore."

New filings for unemployment claims breached the psychologically important 500,000level in the past week, an increase of 12,000 from the previous week's revised number of 488,000.

That came despite data that the private sector actually has been creating jobs. The monthly Labor Department report for July showed 71,000 private jobs were created even as total nonfarm payrolls fell 131,000.

The trend is confounding economists, who say the net job creation in the private sector ought to start having some effect on the weekly number.

The latter figure is significant in that it is the rawest measure of the jobs picture. While the monthly number entails a series of computations based on the government's birth-death model, determinations of who is actually looking for a job and who is discouraged, and a host of other arcane measuring tools, the weekly number is a simple census of how many people filed new claims for unemployment insurance.

"There's got to be an awful lot of job-churning going on if we can have positive private sector employment growth for seven months out of the year and this (weekly claims) thing is drifting up," says Kurt Karl, chief US economist at Swiss Re in New York. "Businesses have got to be laying off a lot of people and hiring a lot of people, and the net is slightly positive."

One of the most vexing problems for policy makers has been what to do about the long-term unemployed.

Claimants under the Emergency Unemployment Compensation provision—who have exhausted their state benefits—surged 260,105 to 4,753,456 for the week ended July 31 (the data lags the weekly claims by two weeks). While that represents a weekly increase of 0.5 percent, the total is 60.5 percent higher than the 2009 figure of 2,961,457.

"For those who doubted it will be a long, drawn-out period, they can't doubt it anymore." -Nomura Securities, David Resler

Congress in July agreed to extend the program until Nov. 30, over objections of some members regarding how to pay for the benefits as well as whether they discouraged recipients from seeking work. The EUC program was created in June 2008 to address the burgeoning unemployment problem when the national rate stood at 5.5 percent; it is now at 9.5 percent.

Economists weren't sure how much of a long-range impact the benefits extension will have.

"Before the programs lapsed, (claims) were on a gentle downward trend. My assumption would have been that we would have stayed on a downward trend. But we may be seeing an interruption of that," Resler says. "For the time being we have to conclude that we are definitely seeing a higher level of claims in recent weeks because people who had lost their benefits are now reclaiming them and we just don't know how much of an impact that is."

Besides the sharp drop in government payrolls and the dynamics of the benefits program, small business remains a major concern.

Recent surveys have shown waning confidence among small business leaders, who believe the general uncertainty of the economic environment combined with higher costs of government health insurance weigh against the costs of hiring new employees.

"The revenue of private held companies has been going down, and if you combine that with the regulatory environment, it makes for poor prospects for these businesses to start hiring people," says Brian Hamilton, CEO of Sageworks, a Raleigh, N.C.-based financial analysis firm. "People just don't feel good. I haven't seen anything like this in 20 years."

The multiplicity of factors lining up against the labor market is sure to stoke up talk about a double-dip in the economy, or at the very least little chance of meaningful gains for quite some time.

"It's not good, it just isn't, particularly when you piece it together with all of the other data we're getting," says Paul Ashworth, senior economist at Capital Economics in Toronto. "This isn't just rising claims and nothing else is going on. We're seeing activity rates going down, we're seeing confidence weaken—a lot of not very encouraging signs."

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