As the nation plods along during what is a quite long recession citizens begin to ask whether or not the downturn is over. The questions are similar to those asked by a child pestering their parent during a long car trip - 'are we there yet?' Almost since the start of the economic decline people have been asking when or where the end is, especially those in the media. Obviously, no one wants to experience an economic downturn. However, hope and questions alone will not make it go away. Like the parent in the car being continuously asked if they have reached their destination, the answer to the economic question is very simple.
The children never seem to understand that they will know when they get to where they are going. Similarly, people in a recession will know when it is complete. While officially only NERA can dictate the timing of a recession, the true end is much more obvious. Factories will open, spending will increase, jobs will be found; just like that - the recession will be over.
I, for one, feel that the economic data released today by the Commerce Department marks a clear end to the recession which lasted from December 2008 until sometime around January-March 2010. Their report shows that the US Gross Domestic Product grew by 3.2% on an annual basis in the first quarter of 2010. Combined with reports showing that consumers are starting to increase their spending and declines in the unemployment rate the GDP numbers provide ample evidence to show the recession to be ending (or possibly over).
While questions can be raised over each of the individual numbers, the combination of all factors makes for a convincing argument that growth can soon restart. What must be done now is simple - impediments to growth must be removed. Specifically the government must be very careful in their fiscal and monetary policies not to retard growth in any way. The economy is still quite weak and the recovery does not have much steam. However, if barriers are not erected growth can soon resume.
Friday, April 30, 2010
Saturday, April 24, 2010
Preventing Another Crash
This past week President Obama gave a speech a few steps down my block on financial reform. During his talk, the President outlined a number of steps which, it is hoped, would prevent the country's economy from ever collapsing again. Many of the economic policies which the current administration has put into place seem to reflect a belief that with proper regulation, the economy will never again fall. Enough government intervention can end the series of up and down business cycles which have been prevalent throughout history.
This idea strikes me as fairly impractical for a number of reasons. I might be biased as I've just completed the book 'This Time is Different,' wherein the authors take a quantitative look at financial crisis on a government level for the last few hundred years. One of their major theories is that situations like the recent US economic decline have happened before (which they clearly demonstrate in their data) and will happen again. During each run-up to an economic crisis, people always believe that 'this time is different' and something will set them apart to prevent a downturn. Alas, during each crisis that belief is proven wrong. In the 2007-current crisis, people believed that the economy had been fixed and they were beyond a cyclical economy. Obviously they were wrong.
So, the question becomes: how come the government can 'fix' the economy now to prevent future downturns, but they never could before? I believe the simple answer is that they can not. Remember, the Federal Reserve was created by the Wilson administration to prevent downturns - the Great Depression proved it could not. The FDIC and SEC were just two examples of Roosevelt era organizations designed to prevent banking crisis' and asset price bubbles. It has been proven many times that they can not prevent those problems. If the US government has many times created new regulations, organizations and frameworks to control the business cycle, but failed - why would this time be any different.
The belief here is that the current government will create some new organizations to 'prevent' future economic problems. These agencies will likely be designed to prevent specific abuses and failures that caused the most recent economic downturn. However, two problems will ensue. First, these agencies will have a great deal of unintended consequences. Businesses will find some loophole or framework which will cause greater abuses or failures in the economic system. The second problem is that the new organizations will not prevent future cycles unless they are so overly regulating that they stifle all economic growth. Prior examples have shown that each time the government tries to control the economy, they fail. Their programs create a vast number of unintended new problems and are still unable to achieve their ultimate goal of a permanent upward economic trajectory.
This idea strikes me as fairly impractical for a number of reasons. I might be biased as I've just completed the book 'This Time is Different,' wherein the authors take a quantitative look at financial crisis on a government level for the last few hundred years. One of their major theories is that situations like the recent US economic decline have happened before (which they clearly demonstrate in their data) and will happen again. During each run-up to an economic crisis, people always believe that 'this time is different' and something will set them apart to prevent a downturn. Alas, during each crisis that belief is proven wrong. In the 2007-current crisis, people believed that the economy had been fixed and they were beyond a cyclical economy. Obviously they were wrong.
So, the question becomes: how come the government can 'fix' the economy now to prevent future downturns, but they never could before? I believe the simple answer is that they can not. Remember, the Federal Reserve was created by the Wilson administration to prevent downturns - the Great Depression proved it could not. The FDIC and SEC were just two examples of Roosevelt era organizations designed to prevent banking crisis' and asset price bubbles. It has been proven many times that they can not prevent those problems. If the US government has many times created new regulations, organizations and frameworks to control the business cycle, but failed - why would this time be any different.
The belief here is that the current government will create some new organizations to 'prevent' future economic problems. These agencies will likely be designed to prevent specific abuses and failures that caused the most recent economic downturn. However, two problems will ensue. First, these agencies will have a great deal of unintended consequences. Businesses will find some loophole or framework which will cause greater abuses or failures in the economic system. The second problem is that the new organizations will not prevent future cycles unless they are so overly regulating that they stifle all economic growth. Prior examples have shown that each time the government tries to control the economy, they fail. Their programs create a vast number of unintended new problems and are still unable to achieve their ultimate goal of a permanent upward economic trajectory.
Tuesday, April 20, 2010
The Benefits of Extending Benefits
The San Francisco Federal Reserve released a fairly interesting paper this week about the effects of benefit extensions on the unemployed. The author, Rob Valletta, came to the conclusion that the large number of benefit extensions by the Federal government have a very small effect on the duration of time job losers are out of work. He looked at a fairly large data set and determined that the extensions, up to 99 weeks in some cases, added only 0.4 percentage points to the almost 10% unemployment rate. This paper contradicts some claims that extended benefits are creating disincentives for people who are laid off to find new employment.
I find Valletta's research very timely in the current economy. Last week, after much partisan wrangling, Congress passed an extension continuing their program of support for unemployment benefits. In normal situations, a person who is laid off is entitled to about 26 weeks of benefits. The amount of their benefit depends on their state of residence but averages about $350 a week. This formula takes into account their prior earnings and length of employment. During the current recession, the Federal government passed a series of laws granting extensions of several months to individuals who are facing the loss of benefits after their 26th week.
The San Francisco paper attempts to quantify how involuntary job losers are not voluntarily extending their periods of unemployment compared to those who decide to quit their job or enter the market. The unemployment benefits only serve to provide a cushion to those out of work. In most cases the benefits are only sixty percent, or less, of a person's prior income. And it is obvious that such a drastic cut in earnings force people to severely cut back their expenses or deplete their savings. The jobless benefits only provide for part of the earnings loss.
Clearly it is not in a person's best interest to remain on the unemployment rolls, even when they can receive benefits for almost two years. The immediate result of a layoff is not the loss of all income, but the loss of about half. In an era when most individuals are spending either more than or their entire income when they have a job, to take away such a large portion of their funds can create sizable shocks to an individuals finances. Thus, while the government provides a cushion of money to soften the economic blows to the unemployed, they are by no means comfortable receiving such a fraction of their prior income. In most cases, rational individuals will do whatever they can to move back to their prior earnings level by finding new work as quickly as possible. Or at least that's what a new San Francisco Fed paper says...
I find Valletta's research very timely in the current economy. Last week, after much partisan wrangling, Congress passed an extension continuing their program of support for unemployment benefits. In normal situations, a person who is laid off is entitled to about 26 weeks of benefits. The amount of their benefit depends on their state of residence but averages about $350 a week. This formula takes into account their prior earnings and length of employment. During the current recession, the Federal government passed a series of laws granting extensions of several months to individuals who are facing the loss of benefits after their 26th week.
The San Francisco paper attempts to quantify how involuntary job losers are not voluntarily extending their periods of unemployment compared to those who decide to quit their job or enter the market. The unemployment benefits only serve to provide a cushion to those out of work. In most cases the benefits are only sixty percent, or less, of a person's prior income. And it is obvious that such a drastic cut in earnings force people to severely cut back their expenses or deplete their savings. The jobless benefits only provide for part of the earnings loss.
Clearly it is not in a person's best interest to remain on the unemployment rolls, even when they can receive benefits for almost two years. The immediate result of a layoff is not the loss of all income, but the loss of about half. In an era when most individuals are spending either more than or their entire income when they have a job, to take away such a large portion of their funds can create sizable shocks to an individuals finances. Thus, while the government provides a cushion of money to soften the economic blows to the unemployed, they are by no means comfortable receiving such a fraction of their prior income. In most cases, rational individuals will do whatever they can to move back to their prior earnings level by finding new work as quickly as possible. Or at least that's what a new San Francisco Fed paper says...
Thursday, April 15, 2010
Increasing Debt Through Refinancing
Being tax-day, I thought I would go through a small exercise in looking at the effects of rising interest rates on refinancing the national debt. I have based my thoughts on the premise that the federal government is going to have to refinance a large portion of its debt in the face of rising interest rates. For example, the average dollar of government debt will come due in less than five years and with the government simply refinancing its debt, this dollar will be borrowed again at a higher interest rate. I decided to use a rudimentary model and look at some potential consequences.
To complete this exercise, I used a number of assumptions to simplify this model. First, I assumed that all bonds mature in either 1, 2, 5, 10 or 30 years - respectively: .239%, 1.036%, 2.572%, 3.84% and 4.714%. Obviously there are other maturities, however, the model became increasingly complex for each added maturities. From this assumption, I gathered the interest rate for each of these maturities from CNBC and then looked at the national debt clock for the $12.8 trillion dollar debt number. Secondly, I did not look at any expansion of the national debt. I eliminated new spending or tax cuts from the model and held the debt constant. Again, this was to simplify the model. Yet, if new debt was included it would exponentially increase the cost of financing public debt as it would likely be done at higher interest rates. My next major assumption was that a constant portion of each maturity comes due each year. For example, this year 1/2 of the 2 year bonds need to be refinanced, 1/5 of the 5 year, etc. Meanwhile, all of the 1 year bonds will mature. Finally, I assumed that the average maturity was just under 5 years. This affected how each maturity was weighted. The first two segments were 35%, the third was 15% followed by 10% and 5% for the remaining maturities.
Based on this rather simple model, I determined that on $12.8 trillion of debt, the annual payment is about $187 billion, or 1.45%. I'm sure my numbers are not totally accurate, but my goal here is only to look at the effects of increasing rates on the financing costs.
Next, I looked at future years under several different scenarios. Each of these years assumed that the fraction described above would mature and be refinanced while the remainder of the debt would remain at the old level. The first situation I looked at was to shift the yield curve parallel upward by 1%. In this situation, the payment increased to $258 billion, or 2.018%. If this were to occur, the portion of the government to service the debt would rise by almost 38%! Mind you, this is only for a 1% increase while some experts are calling for rates to rise significantly more.
After this flat increase, I looked at a number of proportional increases to the base interest rates. These were 25%, 50% and doubling the rates. A 25% increase resulted in a 6% increase in the financing cost, while 50% was a 13% increase and doubling the rate was a 26% increase. These are all much rosier cases than the flat shift of 1%, however, they too would be quite harmful to the national budget.
Finally I looked at some rather sharp increases. I started this exercise again assuming a parallel shift, this time of 5%. This move almost tripled the cost of financing the national debt to just under $550 billion. Lastly I assumed that all rates would increase by a factor of five. This practically doubled the finance cost to $385 billion.
What I took from this exercise was that any increase in the interest rate on the national debt would be incredibly costly to the US government. The main problem lies in two parts. First, existing rates are incredibly low and there is little place else to go except for upward. With the increases in government spending and the inundation of international debt markets with US debt, it looks increasingly likely that this will happen. Second, the average maturity on US treasury debt is fairly short term at under five years. As such, much of the debt is short term and will be very sensitive to interest rate increases. Additionally, any new debt would also have to be financed at higher rates.
This practice was done to show the true cost of deficit spending. None of the assumptions made in this exercise assume the principle on treasury debt is ever repaid, it is only refinanced indefinitely. As interest rates rise, the government must divert an ever increasing amount of its money to just paying more in interest instead of on social spending or even debt reduction.
To complete this exercise, I used a number of assumptions to simplify this model. First, I assumed that all bonds mature in either 1, 2, 5, 10 or 30 years - respectively: .239%, 1.036%, 2.572%, 3.84% and 4.714%. Obviously there are other maturities, however, the model became increasingly complex for each added maturities. From this assumption, I gathered the interest rate for each of these maturities from CNBC and then looked at the national debt clock for the $12.8 trillion dollar debt number. Secondly, I did not look at any expansion of the national debt. I eliminated new spending or tax cuts from the model and held the debt constant. Again, this was to simplify the model. Yet, if new debt was included it would exponentially increase the cost of financing public debt as it would likely be done at higher interest rates. My next major assumption was that a constant portion of each maturity comes due each year. For example, this year 1/2 of the 2 year bonds need to be refinanced, 1/5 of the 5 year, etc. Meanwhile, all of the 1 year bonds will mature. Finally, I assumed that the average maturity was just under 5 years. This affected how each maturity was weighted. The first two segments were 35%, the third was 15% followed by 10% and 5% for the remaining maturities.
Based on this rather simple model, I determined that on $12.8 trillion of debt, the annual payment is about $187 billion, or 1.45%. I'm sure my numbers are not totally accurate, but my goal here is only to look at the effects of increasing rates on the financing costs.
Next, I looked at future years under several different scenarios. Each of these years assumed that the fraction described above would mature and be refinanced while the remainder of the debt would remain at the old level. The first situation I looked at was to shift the yield curve parallel upward by 1%. In this situation, the payment increased to $258 billion, or 2.018%. If this were to occur, the portion of the government to service the debt would rise by almost 38%! Mind you, this is only for a 1% increase while some experts are calling for rates to rise significantly more.
After this flat increase, I looked at a number of proportional increases to the base interest rates. These were 25%, 50% and doubling the rates. A 25% increase resulted in a 6% increase in the financing cost, while 50% was a 13% increase and doubling the rate was a 26% increase. These are all much rosier cases than the flat shift of 1%, however, they too would be quite harmful to the national budget.
Finally I looked at some rather sharp increases. I started this exercise again assuming a parallel shift, this time of 5%. This move almost tripled the cost of financing the national debt to just under $550 billion. Lastly I assumed that all rates would increase by a factor of five. This practically doubled the finance cost to $385 billion.
What I took from this exercise was that any increase in the interest rate on the national debt would be incredibly costly to the US government. The main problem lies in two parts. First, existing rates are incredibly low and there is little place else to go except for upward. With the increases in government spending and the inundation of international debt markets with US debt, it looks increasingly likely that this will happen. Second, the average maturity on US treasury debt is fairly short term at under five years. As such, much of the debt is short term and will be very sensitive to interest rate increases. Additionally, any new debt would also have to be financed at higher rates.
This practice was done to show the true cost of deficit spending. None of the assumptions made in this exercise assume the principle on treasury debt is ever repaid, it is only refinanced indefinitely. As interest rates rise, the government must divert an ever increasing amount of its money to just paying more in interest instead of on social spending or even debt reduction.
Wednesday, April 14, 2010
Help Me! But Please Don't Tell Anyone
A number of large commercial banks have vowed to continue their legal fight against a major news organization today, promising to go as far as the Supreme Court to keep their business secrets. Last year Bloomberg News launched a freedom of information campaign to unseal documents at the Federal Reserve showing which banks received emergency lending from the Fed and how much they received during the recent financial crisis. However, the banks are fighting a campaign tooth and nail to prevent those internal Fed records from being made public. Meanwhile, the Fed is remaining non-committal to both sides.
This lawsuit raises a pair of very interesting issues for the banks and the Fed. First, since the Fed is supported by public funds, shouldn't the media be able to report to the taxpayers where their money went? And, secondly, would the publicity of receiving 'emergency' air stigmatize recipients during a time of crisis? Since there is no clear cut legal basis to determine the outcome of this case, these two questions will likely determine it's outcome.
First, the Federal Reserve is technically a public bank supported by the government. In as much, the funds which the Fed uses are an extension of the Federal government and thus belong to the taxpayers. Along the lines of this argument, the media outlets should be allowed to report how public money was lent to private companies. It is not like it was a loan from one private bank to another, this was taxpayer money being lent out. Additionally, this was the type of situation where the Freedom of Information Act was intended to be used - giving public clarity to behind the scenes transactions. Unfortunately, the writers of the bill never imagined such a situation and thus did not specify the Federal Reserve banks under its purview.
The next major issue arises as to whether public knowledge of an emergency loan would stigmatize recipients. One of the famous interactions during the original TARP bill was when Treasury Secretary Paulson made all of the major banks take the aid regardless of whether they individually needed it. This was done so that a bank taking the aid would not be identified as weak and thus subject to predatory competition. By releasing the Fed's records, a decision would effectively identify the weakest banks and prevent others from engaging in future emergency actions.
By virtue of an unclear law and a badgering news organization, a number of large banks have been backed into a corner. When emergency aid was doled out last year, no one imagined potential long term consequences. The current information request by Bloomberg to divulge how taxpayer money was lent to troubled banks is a clear example of these problems. The banks took the aid to protect the system. They were not thinking about a year down the road, but instead only the next day. Such thinking is fraught with holes and future problems.
This lawsuit raises a pair of very interesting issues for the banks and the Fed. First, since the Fed is supported by public funds, shouldn't the media be able to report to the taxpayers where their money went? And, secondly, would the publicity of receiving 'emergency' air stigmatize recipients during a time of crisis? Since there is no clear cut legal basis to determine the outcome of this case, these two questions will likely determine it's outcome.
First, the Federal Reserve is technically a public bank supported by the government. In as much, the funds which the Fed uses are an extension of the Federal government and thus belong to the taxpayers. Along the lines of this argument, the media outlets should be allowed to report how public money was lent to private companies. It is not like it was a loan from one private bank to another, this was taxpayer money being lent out. Additionally, this was the type of situation where the Freedom of Information Act was intended to be used - giving public clarity to behind the scenes transactions. Unfortunately, the writers of the bill never imagined such a situation and thus did not specify the Federal Reserve banks under its purview.
The next major issue arises as to whether public knowledge of an emergency loan would stigmatize recipients. One of the famous interactions during the original TARP bill was when Treasury Secretary Paulson made all of the major banks take the aid regardless of whether they individually needed it. This was done so that a bank taking the aid would not be identified as weak and thus subject to predatory competition. By releasing the Fed's records, a decision would effectively identify the weakest banks and prevent others from engaging in future emergency actions.
By virtue of an unclear law and a badgering news organization, a number of large banks have been backed into a corner. When emergency aid was doled out last year, no one imagined potential long term consequences. The current information request by Bloomberg to divulge how taxpayer money was lent to troubled banks is a clear example of these problems. The banks took the aid to protect the system. They were not thinking about a year down the road, but instead only the next day. Such thinking is fraught with holes and future problems.
Monday, April 5, 2010
Two Up Equals One Down
Looking through some headlines this morning I noticed a pair of important numbers moving upwards which have the potential to stall an economic recovery. This pair of numbers was the yield on the 10 year Treasury Bonds (which moved above 4%) and the price of a barrel of oil (which took a run at $87). While these levels are by no means dire their coincident upward movement is concerning, especially with a weakened national economy.
The US government has made its Keynesian approach to economic policy crystal clear. This type of strategy is dependent upon the government being able to fund massive spending projects in order to spur economic growth. In order to fund their expenditures the government has become dependent upon borrowing and issuing new Treasury debt. For the last few years this practice has been relatively cheap with historically low interest rates. The low rates took away incentive for the government to raise taxes to pay their expenses since borrowing money was so cheap.
However, with more and more debt being issued, borrowers are demanding higher rates of interest to protect against a potential fall in the value of the dollar. The movement in the 10 year bond over 4% is evidence that lenders are not going to continue to loan cheap cash to the government and that Keynesian expenditures are going to become more expensive. The interest on a $700 billion dollar stimulus package would cost $28 billion a year at 4% versus $14 billion a year at 2% (obviously not all debt is issued at the same maturity/rate). Clearly the practice of using debt to finance spending is getting more expensive.
Like interest rates on government debt, the price of a barrel of oil has also been making an upward move in recent weeks. The price was close to $87 today before settling just below $86. Another spike in the price of oil could stall an economic recovery faster than rising interest rates. I had theorized in the past that commodity price spikes can tip a healthy economy into recession as the price of a key product, like oil, has the potential to affect the prices of many other goods.
If the price of oil rises, then transportation costs rise and consumers can purchase fewer goods. A weakened consumer demand can threaten the Gross Domestic Product and force decline instead of growth. As a major factor in the determination of a recession, a fall in the GDP would stifle any recovery.
There is a great chance that the current recession will conclude in either Q1 or Q2 of 2010. However, there are factors which can endanger economic growth and tip the American economy back into recession should certain trends continue. Two of the more dangerous trends are a rise in the interest rate on Treasury obligations and a rise in the price of oil. If these trends continue too high for two long, economic growth can be seriously threatened and the economy might not emerge from recession for a lengthy period of time.
The US government has made its Keynesian approach to economic policy crystal clear. This type of strategy is dependent upon the government being able to fund massive spending projects in order to spur economic growth. In order to fund their expenditures the government has become dependent upon borrowing and issuing new Treasury debt. For the last few years this practice has been relatively cheap with historically low interest rates. The low rates took away incentive for the government to raise taxes to pay their expenses since borrowing money was so cheap.
However, with more and more debt being issued, borrowers are demanding higher rates of interest to protect against a potential fall in the value of the dollar. The movement in the 10 year bond over 4% is evidence that lenders are not going to continue to loan cheap cash to the government and that Keynesian expenditures are going to become more expensive. The interest on a $700 billion dollar stimulus package would cost $28 billion a year at 4% versus $14 billion a year at 2% (obviously not all debt is issued at the same maturity/rate). Clearly the practice of using debt to finance spending is getting more expensive.
Like interest rates on government debt, the price of a barrel of oil has also been making an upward move in recent weeks. The price was close to $87 today before settling just below $86. Another spike in the price of oil could stall an economic recovery faster than rising interest rates. I had theorized in the past that commodity price spikes can tip a healthy economy into recession as the price of a key product, like oil, has the potential to affect the prices of many other goods.
If the price of oil rises, then transportation costs rise and consumers can purchase fewer goods. A weakened consumer demand can threaten the Gross Domestic Product and force decline instead of growth. As a major factor in the determination of a recession, a fall in the GDP would stifle any recovery.
There is a great chance that the current recession will conclude in either Q1 or Q2 of 2010. However, there are factors which can endanger economic growth and tip the American economy back into recession should certain trends continue. Two of the more dangerous trends are a rise in the interest rate on Treasury obligations and a rise in the price of oil. If these trends continue too high for two long, economic growth can be seriously threatened and the economy might not emerge from recession for a lengthy period of time.
Saturday, April 3, 2010
Bring On the Discouraged, the Grads and the Census.
With the start of a new month come new jobs numbers. The unemployment rate remained constant at 9.7% while the economy on the whole added about 162,000 jobs. Clearly, in the middle of a recession, adding any new jobs is a good sign but like previous months the numbers must be taken with a grain of salt. A number of factors will combine to cause the unemployment rate to remain elevated in the coming months as the economy begins to recover and continues to add new jobs.
First, as I've said in previous blogs, the unemployment rate is not likely to drop anytime soon even though jobs are slowly being created. During the current recession, the calculated unemployment rate topped out around 10% even though it should have gone much higher. Huge numbers of people either stopped looking for work and dropped out of the labor force or decided to take on less desirable part time work. A more accurate judge of the labor market during this recession was the underemployment rate which added these people into the unemployment rate. This number reached into the high teens and is still around 17%. That means 1 out of 6 people in the United States want more work than they have. Though this number has improved, it is still significantly above the norm.
Another important thing to consider when thinking about the US labor picture are those who are about to graduate from college or high school and enter the labor market. This seasonal event is considered when the overall unemployment rate is calculated. However, the high unemployment amongst the young is another cause for concern. The future labor force is seeing its skills stagnate as many new graduates are sidelined. Unfortunately, while 162,000 new jobs have been created, the economy has still lost jobs since the start of the recession while the population as a whole has increased. Additionally, many graduates have decided to delay their entrance into the labor force when they could not find jobs by continuing in school. This may further bloat the number of new entrants into the labor force over the coming months.
Lastly, there has been one employer who has been adding workers at a breakneck pace - the Census. The government is hiring vast numbers of people for the decennial population count. Yes, giving these large quantities of workers a job is great, however these jobs will not last. For the most part, these jobs are low paying and temporary. The silver lining is that adding these workers temporarily might be just enough to give them work until the recession ends and enough new jobs are created for them to move to permanent positions.
The current employment picture is unclear. There are clearly signs that the economy is improving and that people will move off of unemployment rolls into new work. However, the picture is also very fragile. Many new people are about to join or return to the labor force while many others have moved into temporary work. If enough new, permanent jobs are created in the coming months the economy will recover. But, if permanent positions are not forthcoming the overall economy has the potential to fall again.
First, as I've said in previous blogs, the unemployment rate is not likely to drop anytime soon even though jobs are slowly being created. During the current recession, the calculated unemployment rate topped out around 10% even though it should have gone much higher. Huge numbers of people either stopped looking for work and dropped out of the labor force or decided to take on less desirable part time work. A more accurate judge of the labor market during this recession was the underemployment rate which added these people into the unemployment rate. This number reached into the high teens and is still around 17%. That means 1 out of 6 people in the United States want more work than they have. Though this number has improved, it is still significantly above the norm.
Another important thing to consider when thinking about the US labor picture are those who are about to graduate from college or high school and enter the labor market. This seasonal event is considered when the overall unemployment rate is calculated. However, the high unemployment amongst the young is another cause for concern. The future labor force is seeing its skills stagnate as many new graduates are sidelined. Unfortunately, while 162,000 new jobs have been created, the economy has still lost jobs since the start of the recession while the population as a whole has increased. Additionally, many graduates have decided to delay their entrance into the labor force when they could not find jobs by continuing in school. This may further bloat the number of new entrants into the labor force over the coming months.
Lastly, there has been one employer who has been adding workers at a breakneck pace - the Census. The government is hiring vast numbers of people for the decennial population count. Yes, giving these large quantities of workers a job is great, however these jobs will not last. For the most part, these jobs are low paying and temporary. The silver lining is that adding these workers temporarily might be just enough to give them work until the recession ends and enough new jobs are created for them to move to permanent positions.
The current employment picture is unclear. There are clearly signs that the economy is improving and that people will move off of unemployment rolls into new work. However, the picture is also very fragile. Many new people are about to join or return to the labor force while many others have moved into temporary work. If enough new, permanent jobs are created in the coming months the economy will recover. But, if permanent positions are not forthcoming the overall economy has the potential to fall again.
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