June Employment Report: Reasons for Optimism and Concern
The unemployment rate, which now stands at 8.2%, is likely to stay the same or go down slightly to 8.1%. Either development would be a welcomed outcome because of the turmoil in domestic and international markets.
The surprisingly good news that the economy has experienced lately is described below. We also outline reasons why there is continuing concern.
On balance, the good news outweighs the bad, and we are therefore optimistic about the unemployment picture.
More importantly, the good news signals that the recent downturn in the economy may be just another blip, instead of a new bad trend.
Below, we outline why we expect the unemployment rate to remain the same or go down, rather than increase again as it did last month.
Five Reasons for Optimism
- The ADP National Employment Report on jobs created was released today. At showed that 176,000 new jobs were created. This greatly exceeded expectations, as economists expected only 100,000 to be created. Last month 136,000 new jobs were reported by ADP.
- First time claims for unemployment insurance also surprised forecasters. They had expected 386,000 and actual claims were 374,000. This is also a positive barometer because it signals that fewer people are losing jobs.
- Oil prices have plummeted to $79.40 a barrel after averaging $95.00 over the last 12 months. Lower gas prices mean consumers have more money to spend, which increases sales and thereby employment.
- Residential construction increased notably from 1.6% to 2.9%. Recovery in the construction industry is a most important outcome because 30% of all still unemployed workers were displaced from the construction industry.
- A compromise occurred in the Euro zone last week. German Chancellor Angela Merkel gave in and the17 member countries of the euro zone agreed on a new procedure for debt relief. The compromise means that domestic banks can be rescued directly by the European Central Bank, without having to make all loans through member governments. Troubled banks can now be assisted without driving up the sovereign debt of member countries. In return, all countries agreed to stricter regulations. The agreement relieved pressure temporarily on key countries such as Spain and Italy.
Three Reasons for Concern
- Between May and June consumer sentiment decreased significantly, from 79.3 to 73.2. This is a matter of concern because consumer spending drove the economy forward during the recent three-month slowdown. As they become more pessimistic, they will increase their saving and reduce their spending.
- Auto and truck sales have been one of the strongest sectors of the economic recovery. Over the last month however, they fell from 14.4 million to 13.7 million units, further reflecting the increased saving and reduced spending of consumers.
- The PMI (Purchasing Managers Index) indicated that manufacturing purchases decreased from 53.5 to 49.7 over the last month. Manufacturing orders are a cornerstone of any economic recovery, and ideally one would like to see the index above 50.0. Over the last twelve month, it averaged 52.6.