The Bureau of Labor Statistics announced last Friday morning (8/7) the
unemployment in July declined a tenth of a percentage point from June,
to 9.4 percent from 9.5 percent.
This welcome news prompted President Obama to declare a few hours later
that his administration has "rescued our economy from catastrophe."
Mr. Obama should be careful about overstatement. His overpromising
about the $786 billion "stimulus" bill passed in February (his economic
team said it would keep unemployment from rising above eight percent) is
a big reason why so many are wary of his health care reform promises.
The BLS reported another 247,000 Americans lost their jobs in July.
This is a distinct improvement over June, when 467,000 were laid off or
fired. But how can the unemployment rate go down if the number of
unemployed is still going up?
The reason is because the BLS doesn't count the number of unemployed
workers who've become so discouraged they've stopped looking for work.
According to the BLS, 796,000 people stopped looking for work in July.
That amounts to two tenths of a percent of the labor force. Had they
been included in the BLS' calculations, the unemployment rate would have
increased to 9.6 percent instead of declining to 9.4 percent.
If the number of discouraged workers who quit looking for work in the
months before July were added in, the unemployment rate would be still
higher. The BLS offers an unemployment rate that includes discouraged
workers. It increased to 10.2 percent in July from 10.1 percent in
According to the BLS, the number of the long term unemployed (27 weeks
or more) climbed by 584,000 in July to five million. The long term
unemployed now account for a third of all unemployed persons, the BLS
Overall, the percentage of Americans of working age with jobs declined
in July to 59.4 percent from 59.5 percent in June, 60.5 percent in
January, the BLS said.
Things are actually a little worse than this number indicates because,
according to the BLS, there were 8.8 million people working part time in
July who really want to work full time, but can't find full time jobs.
The BLS has been calculating the unemployment rate the same way for a
long time, so there is no chicanery here. But it's important to know
the real rate of joblessness, because consumer spending is the great
engine of our economy, and people with jobs spend more than do people
without them. Also, the unemployed are more likely to default on credit
card payments, home mortgages and auto loans.
Things could get worse in a month or so, because about then people who
lost their jobs last fall will be running out of eligibility for
unemployment insurance. Congress will have to expand eligibility or
their already meager incomes will plummet.
If more people default on their credit cards, mortgages and auto loans,
that'll put more pressure on banks. As you know, many of our largest
banks required a massive federal bailout after the residential housing
Most experts (the very same experts who were caught by surprise when the
housing bubble burst) think home prices are at or near the bottom. This
is one reason why the stock market has been rising.
But, the Wall Street Journal reported July 21, commercial mortgages (on
office buildings, shopping malls, hotels and apartments) are now failing
at the fastest rate in nearly 20 years. This is an $8 trillion market.
And, as they did with home loans, banks have sliced up commercial loans
into derivatives that multiply risk.
It's chiefly regional banks rather than the "too big to fail" national
giants such as Citibank or Bank of America that are holding the shaky
commercial paper. But if one or two of them were to fail, it could
start the bank run we narrowly averted last fall, because the Federal
Deposit Insurance Corp. is nearly broke. In theory, the FDIC insures
our bank deposits up to $250,000. In practice, the FDIC has about $15
billion on hand to insure $13.5 trillion in deposits, or about a penny
for every $9.
"A large number" of bank failures may occur through 2010, the chairman
of the FDIC, Sheila Bair, said in a letter in March.
I hope the economy has turned the corner. But administration claims
that it has may be as misleading as claims unemployment has actually