Nonfarm payrolls declined by 190,000, more than the expected figure of 175,000. While this jump would have some technical component to it, the current unemployment rate is still a reality. More interestingly, the largest job losses have been in the construction, manufacturing and retail trade. The dip in construction is not surprising as there is a large scale fear that after the scheme of first time home buyer credit of USD 8,000 expires (slated for end of this month), demand will plummet.
Going through the numbers, there are quite a few interesting observations to be made:
· Unemployment among full time workers (i.e those desirous of working full time or are on lay off from full time job) has crossed 11% mark to reach 11.1%
· 156,000 additional people remained unemployed for more than 26 weeks, thereby making them ineligible for unemployment insurance
· In last one year, an additional 3.2 million people have stopped receiving unemployment allowance
· Of the total unemployed, currently 35.6% of them are not getting any allowance
· The average duration of unemployment has gone upto 26.9%, the highest ever recorded
What this means is that recovery (or some acceptable form of it) will only be possible if the stimulus package continues. Withdrawal of stimulus will affect likely nascent recovery.
Not surprisingly, yesterday the Senate passed the proposed extension of unemployment insurance benefit. Once this is okayed by the House and the president, the Emergency Unemployment Compensation Extension Act (HR 3548) will provide immediate assistance by extending relief to those workers whose benefits would or has already run out. The legislation will provide families in all states with 14 weeks of additional benefits, and six more weeks to the 27 states with the highest unemployment rate. Workers in these high unemployment states who have exhausted or will soon exhaust their benefits will be eligible for a total of 20 additional weeks of emergency unemployment compensation.
Now, the funny part. The bill would cost $2.4 billion, and will be paid for with an extension of the federal unemployment tax (FUTA). In essence, the government will force the companies to pay more tax for hiring employees, which would then be used to pay the allowance.
My fear is that, this will actually make the companies even more reluctant to hire full time workers. When the business is not sure about sustainability of demand, they would not prefer to hire full time workers as it will be even more costly (given the imposition of additional tax). They would prefer to increase productivity of the existing workers (as was evident from the rise in productivity numbers released yesterday), hire part time workers (as is evident from a dip in unemployment rate among part time workers, from 6.4% to 6.1%) and increase the work hours of part time workers.
Another point to be noted is that, the Senate yesterday also approved extension of the USD 8,000 first-time homebuyer tax credit through April 30, 2010 and provide for a USD 6,500 credit to new purchasers who have lived in their current residence for five years or more. This will, ofcourse, moderate the fall (may even see some increase) for some more months going forward. But this is more about postponing the inevitability and preponing the future demand (which will have even adverse impact on recovery).
Issue is, the basic problem stays. Consumers would need to contract and deleverage. Continuing the allowance for some more months will not lead to any sudden loosening of their purse strings, wiser as they are with recent experience of jobs hard to come by while bills (to be paid) being the reality. Companies would have been better off if they would have been incentivized by the government to hire people, which would have brought back some stability and confidence.
One event look increasingly (read ominously) possible. The double dip recession, the moment the government realizes that the fiscal burden is becoming too high and starts to exit. Brace for an even more difficult 2010.