11/13/2009
By Carlos Guillen, Semiconductor Analyst

While consumers had been feeling a sigh of relief as they perceived that the rate of job losses was decreasing, they are now realizing that "less bad" job losses is just not good enough, particularly as the unemployment level recently topped 10% sooner than expected.

Last week The Bureau of Labor Statistics released its October employment results in which it stated that the unemployment rate reached 10.2%, which increased from 9.83% reported in September and landed above the Street's estimate of 9.90%. In addition, non-farm payroll employment decreased by 190 thousand, a larger decline than the 175 thousand job losses economists expected. The situation is actually more alarming than this. If we include in the unemployed number "Part time for economic reasons" of 9.28 million and "Marginally attached to the labor force" of 2.37 million, we calculate an adjusted unemployment rate of 17.5% which increased from September's figure of 17.0% (see chart below). The November unemployment rate increase is concerning not only because of its level but also because it continued to show that people were moving out of the workforce, throwing in the towel as they see that there are no jobs.

As it can be seen below, it is also worth mentioning that average weekly hours during this recession have been on the most pronounced downtrend of the past two recessions. We believe that, to an extent, weekly work hour reductions artificially suppress the unemployment rate from reaching higher values. Moreover, when the economic recovery does come around, employers will likely just increase working hours before hiring new employees.

Consumers had been seeing the light at the end of the tunnel, as most economic indicators were trending favorably. However, it should be noted that the main drivers of these indicators have been the massive spending the Government has embarked on and the cheap money the Fed has been providing by keeping interest rates low. These drivers were meant to give the economy a jolt and are not sustainable in the long run.

Consumers are realizing all this and have been turning less confident according to the University of Michigan Consumer Sentiment index. This index landed lower than expected in November, decreasing to 66.0 from the 70.6 level posted in October and falling below the Street's expectation of 71.0.

Consumers are now getting a different perspective about the future and are beginning to realize that the even as the rate of job losses gets less bad, companies will not be looking to hire for quite some time, increasing the risk that delinquencies on credit cards and consumer loans will increase.

Consumer spending is very critical component of the economy, currently representing 71% of GDP, and if consumers hold back on spending as a result of their less confident outlook, the economy can dip back into another recession. Government spending should help, but at the end of the day consumer spending has to be sustained on its own legs, not assisted by the government.

All in all, despite the lessening job losses, we believe that the current job situation is very bad. We believe that the rising and prolonged unemployment rate will likely deteriorate consumer confidence, reduce labor income, exacerbate the housing market's problem, endanger the banking system, and attenuate consumer spending. All this, of course, will likely increase the potential for a double dip recession, turning the light at the end of the tunnel into an incoming train.