Unemployment Rate Drops, but Joblessness Continues to Plague the Economy

By Jason Simpkins
Managing Editor
Money Morning

The U.S. unemployment rate slipped to 9.4% in July from 9.5% in June, the most encouraging sign yet that the U.S. recession is easing.

But the news – released in a government report Friday – isn’t all good: Unemployment is likely to remain high in the months to come as some of these encouraging indicators of new economic growth evolve into a painful jobless recovery.

Friday's jobs report and other recent data "reinforce our view that the U.S. recession ended in June, and we have raised our third-quarter 2009 growth forecast to 3.5%," Christian Broda, a Barclays Capital (NYSE ADR: BCS) economist in New York, wrote in a research report yesterday.

Alan Krueger, the U.S. Treasury Department's top economist, said he thought forecasts that growth would resume this year were "plausible" but expressed concern about long-term unemployment, which remains as a nagging problem.

"The administration is constantly looking at how to get people back to work, how to lessen the pain of the recession," Krueger said in a news briefing.

In the government report released yesterday, the U.S. Labor Department said that U.S. payrolls fell by 247,000 after tumbling by 443,000 in June.

Factory payrolls fell by 52,000, their smallest decline in a year. Builders shed 76,000 jobs, an improvement over June’s decline of 86,000, and service-sector payrolls fell by 119,000 last month after dropping 220,000 in June.

Monthly job losses peaked at 741,000 in January.

While optimistic about the figures, analysts warned that the unemployment rate remains high and said that American consumers are likely to feel considerable strain for months to come.

Retail sales likely dropped for the eleventh consecutive month in July. And the two leading indicators of U.S. consumer sentiment – the Reuters/University of Michigan index of consumer sentiment and the Conference Board’s confidence index – continue to show weakness.

The Reuters/UM index dropped to 66 in June from 70.8 the month before, and a preliminary report for July shows further erosion to 64.6. The Conference Board’s index fell to 46.6 in July, down from June’s 49.3.

We have in motion a turnaround in the labor market,” James O’Sullivan, a senior economist at UBS Securities LLC (NYSE: UBS) told Bloomberg News. “For a sustained pickup in consumption, we need a sustained improvement in the job market, and hopefully that’s in process now.”

Also, the official 9.4% rate doesn’t reflect the complete unemployment picture, because it doesn’t include people who were unable to find jobs and subsequently left the work force.

The rate of unemployment was actually 10.1% in June and 10.2% in July, according to the Bureau of Labor Statistics (BLS), which includes discouraged workers in its analysis.

The jobless have also been unemployed for longer stretches of time. The number of long-term unemployed – those jobless for 27 weeks or more – jumped to 4.9 million from 4.4 million in June. That means 32.5% of the all those who are unemployed had been looking for work for longer than half a year, a statistic that was up from 28.9% in June.

That problem is particularly severe as jobless benefits for many unemployed Americans are beginning to run out. Unemployment benefits generally are offered for a period of 26 weeks.

About 540,000 people nationwide will run out of benefits by the end of September, with the clock running out on an additional million by the end of the year, according to the National Employment Law Project.

"You have this desperate situation with long-term unemployment, and now folks are running out in big numbers of unemployment benefits," Maurice Emsellem, policy co-director of the National Employment Law Project, told the Los Angeles Times.

Long-term unemployment will also keep many young, first-time jobseekers on the sidelines as more experienced unemployed workers file back into the workforce.

"Long-term unemployment is debilitating for people trying to find jobs in the first place," University of Texas Prof. James K. Galbraith told TIME magazine. "Even if things stabilize and start to improve, bringing the unemployment rate down below 9% is going to be a struggle."

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