8/10/2010
By Carlos Guillen, Semiconductor Analyst

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While the unemployment rate result for the month of July did not appear to get worse, and while its trend appears to be slowly improving, I think that just looking at the rate itself is not telling the entire story. According to the department of labor, the July unemployment rate clocked in at 9.5%, flat with the unemployment rate in June. However, the encouraging aspect of the result was that it was better than the Street's expectation that called for a slightly worse unemployment rate of 9.6%. Clearly economists are not seeing the unemployment situations getting better any time soon, and I think this situation has actually be getting worse.

To analyze the dynamic of what occurred during July, let us begin by listing some facts. The number of people employed decreased by 159 thousand, those unemployed decreased by 24 thousand, and those labeled as not in the labor force increased by 381 thousand. So if 159 thousand lost their jobs, then the number of those unemployed should have increased by this amount; however, those unemployed actually decreased. The reason for this is that 183 thousand people that were previously unemployed had given up and stopped looking for work during the prior four weeks before the survey was taken. As a result, these people were now labeled as "not in the labor force." This, in combination with 198 thousand new entrants to the civilian non-institutional population, amounts to the 381 thousand increase in the "not in the labor force" figure.

Of course, one might expect that if 183 thousand people gave up looking for work, the "marginally attached to the labor force" figure should have significantly increased. However, this was not the case. The marginally attached level increased by only 31 thousand to 2.62 million. To understand why this was the case, one has to recall that those considered marginally attached wanted and were available for work, and had looked for a job sometime in the prior 12 months. Therefore, those that had looked for work 13 months ago are no longer part of the marginally attached. This exclusion likely represents a large number of individuals as the lack of employment is pushing people to give up on their job searches for longer periods of time than normal. As partial proof of this, we can observe that the level of the marginally attached has been running much higher than what it was at the beginning of the recession. What this means is that large numbers of people are dropping out of the marginally attached figure but lots more are freshly included as they are just beginning to give up looking for work, not significantly changing the overall level.

As far as the unemployment rate is concerned, it remained constant at 9.5% because the rate of decrease of employment was approximately the same as the rate of decrease of unemployment. In this circumstance, the unemployment rate can be misleading because as long as the decline in the rate of employment and unemployment remains approximately the same, the unemployment rate will appear flat. This, of course, is not a good thing because the civilian labor force is shrinking.

Not even looking at the adjusted unemployment rate (the so called U-6 that includes marginally attached job seekers, as well as those forced to work part-time) is helpful, and this rate can still be misleading since the marginally attached did not change that much for the reason I have just explained.

I think that to get a better measure of what has been occurring most recently, one has to look at the employment-population ratio, which is the percentage of the civilian non-institutional population that is employed. As it can be observed below, this ratio has been getting worse during the last three consecutive months, but will this be a continuing trend?

Looking forward, I am not that pessimistic about the job situation, and I expect the employment-population ratio to level off. The production-manufacturing work week has been increasing at a nice pace although it stalled most recently; however, in general this is indicating that the probability of hiring is ramping up.

I do not see any miracles happening this year, and I expect the unemployment-population ration to stay fairly flat for the rest of 2010, while the unemployment rate will likely inch lower, but still remain above 9%. The unemployment rate will likely decline into the 8% range by the end of 2011 and into 2012. The employment losses have been so massive that normal unemployment rates (between 5% and 6%) are not likely to be reached until the middle of this decade.

Carlos Guillen
Wall Street Strategies