After trickling forward in terms of job growth in the United States, the August numbers released Friday were met with alarm. The numbers suggest that companies have stopped hiring and are maintaining the status quo in terms of head count. Based on this release, data equity markets sold off and gold rallied as concerns arose about the strength of the US economic recovery. Banks in particular including much maligned Bank of America were hit as a result.
So why does unemployment matter, why is it high, and what do we expect for the future?
Unemployment is an important key economic driver as employment drives consumption. Without consumption, the US economy will stagnate because a significant percentage of US Gross Domestic Product (GDP) is consumption. Additionally, overall economic activity including real estate sales and other economic measures are impacted by higher unemployment. Jobs really do matter which is why the focus by politicians and the Federal Reserve is on job creation.
We believe that the natural unemployment rate in the United States will likely be closer to 7% rather than the historic norm 4%. Structural changes in economies across the globe are causing a shift in employment patterns. Jobs are being outsourced outside of the United States as higher-paying jobs remain within the country. This means that the job market is pushing down 2 differing paths.
Workers that have less education and lower level skills are finding it increasingly difficult to find employment while those with higher education are finding opportunities (at lower pay rates than they have been accustomed to in the past). The economy is in the midst of a structural change that cannot be denied and is a factor in the increases unemployment rate.