Last Friday, President Barack Obama proposed massive tax credits estimated at $33 billion to encourage small businesses to hire workers and raise current employees’ wages. According to the plan, employers would receive a payroll tax credit of up to $5,000 for every net new employee they hire in 2010. The proposal also allows businesses to claim tax credits for pay raises, such that they will receive a bonus 6.2 percent tax credits on aggregate wage increases in excess of inflation. Via the new plan, the Obama administration is simultaneously seeking to stimulate employment by reducing payroll taxes and to regain some political capital after recent Democrats’ mishaps. The new initiative came hours after the authorities announced that the real gross domestic product in the United States increased at an annual rate of 5.7 percent in the fourth quarter of 2009.
Most of the economists agree that the US economy has gradually gained speed over the course of 2009, mainly due to the $700 billion government stimulus package. At this point, I do believe that the previous year strength would marginally carry over into the first half of 2010 while the real unemployment rate (U-6) will stay above 15 percent. The unemployment rate is still near a 27-year high, and although monthly job losses are slowly replaced by job gains, the official jobless rate (U-3) will hover above 10 percent in 2010. The imminent mild improvement in the labor demand will have a delayed effect on the job market since the employers will prefer extending the weekly hours worked rather than adding new workers. Gradually more people will actively look for jobs while job creation initiative will face many stumbling blocks.
As seen in the chart, the biggest problem with the current economy is that it is losing more jobs than it creates, such that the separations rate (the ratio of employment terminations to total workers employed) has been above the hiring rate for almost two years. The good news is that the gap between hires and separations is getting smaller by the month, which should theoretically have a positive effect on the unemployment rate. Even though the downward trend in hiring bottomed-out in July 2009, the net change in non-farm payrolls (NFP) was still down in December. Going forward, there are many aspects that will make the economic recovery without a healthy job market a very plausible scenario. Allow me to demonstrate how the official unemployment rate (U-3) will pick-up despite the monthly net gains in NFP.
According to the Labor Department, the number of the long-term unemployed (out of work for 27 weeks or more) has hit the highest rate since 1948, and it accounts for forty percent of the unemployed. As we know from Economics 101, the official unemployment number is the U-3 rate, and it is defined as “total unemployed, as a percent of the civilian labor force“. If we recall the Real Unemployment Picture article, the labor force reserve (people that have not had a job for a long period of time, gave up looking for full time work, but would work if they could find a full-time job) is not included in the U-3 number. Once the discouraged job seekers return actively to the civilian labor force, the U-3 statistic will definitely read higher values in the near future.
Toni,
Do you think also that Uncle Sam is messing the numbers with a presumably 1 million jobs that were under reported from April 2008 through March of 2009? Maybe we’ll have a surprise Friday regarding this.
Bogdan
Bogdan,
I have heard that today at CNBC from Rick Santelli. Since he was a trader, I tend to believe him. So, it is embedded in the price already. Pay attention to that.
For tomorrow I expect NPR a notch around zero.
Toni,
I did get the issue in the note from Larry Levin at 2:32 PM (RO time). He warned starting from the beginning of October about “revision of the ridiculously flawed jobs data” … “Have you figured out yet that the “birth/death” statistical model of new jobs created over those lost is nothing more than a political game?”
Also, according to Bloomberg another revision will come next year and will be an additional 990,000 job losses beyond whatever the government discloses. Said another way, Uncle Sam is willfully underreporting job losses by nearly 2 MILLION JOBS.
I’m wondering how BSE will react tomorrow morning. I guess they’ll go wild rather then wait until 3:30 for the numbers.
Bogdan
Bogdan,
Watch for the spillover effect in Asia, then Europe. US fell less than EU and I am afraid the NFP will be on the back-burner tomorrow morning. I am afraid, PIIGS will be the top of the list again. The rumor is that $40 billion deficit has been hidden by the Greeks authorities.
Toni,
Do you think after all, who pays attention to the fundamentals, eventually is doing good ?
I’m asking this especially in the context of the last days when good news regarding earnings, dividends etc were the subject of: Cisco, McDonald’s, Covidien etc but the market shrugged off them.
Bogdan
Bogdan,
You should know by now that in the long-run, fundamentals will prevail. However, technical levels play a huge role these days. For instance, yesterday, NY Merc oil contract lost $2 in less than 20 min.
When panic and margin calls dictate the market, very few stocks stay in positive territory, regardless of the endogenous part.
Toni,
Another rookie question: why NYSE is caring that much about the financial status of the PIIGS since I don’t know how many companies from PIIGS are listed on NYSE.
Why should the price of the stock of companies like BANCO BRADESCO, Baidu, AMERICAN SUPERCONDUCTOR, Microsoft, Google, or ZOLL MEDICAL CORP be affected by the economies of Por, Ire, Spa etc ?
Thank you,
Karl
Karl,
I will try to make a long story short. 50% of the S&P500 companies draw their profits from outside US. EU is definitely important for the American companies. Though, the real explanation has to do with RISK, flight to quality and USD carry trade.
Toni,
I’m reading WSJ today and see that the FED intends to first removing some cash from the financial system and then raise rates … how does the FED retrieve all that cash ? What’s the mechanism, tools and from WHO does it retreive ? . Daniel
Daniel,
In Dec ’08, the Fed cut the discount rate to 0.5%. Now, Fed is to marginally increase the spread between the discount rate and the target federal funds. So, no hike for the foreseeable future.