How Deep and Dark is the Unemployment Tunnel?

January 12, 2009 - 9:43AM

(bettertrades) - Last Friday's malicious Labor Report is signaling dark days ahead for the U.S. economy. The U.S. Labor Department reported a 524,000 decrease in private payrolls during December, the largest drawdown in aggregate jobs since 1945. Unemployment hit 7.2%, representing a 16-year high.

The ADP forecast issued on January 7th suggested last month's loss of jobs would be steep, and Friday's official report affirmed those fears. Highlighting the free-fall in gross domestic product, total hours worked dropped by 1.1%. The drop in hours worked reflects not only the drop in employment but also scaling back the operations of part-time workers.

Alcoa got the party, or funeral, started late last Tuesday when they announced intentions to slash 13,500 jobs, in addition to plant closing and production cuts.

Like real estate, unemployment concentration is highly localized. States with the highest rate of unemployment include Michigan, Rhode Island, California, South Carolina, and Oregon, all with rates over 8%. Wyoming, North Dakota, South Dakota, Utah, and Nebraska represent states with the lowest rate of unemployment. By region, the west and Midwest continue to post greater rates of joblessness, while the northeast and south are realizing smaller relative percentages of declines.

For historical perspective, the current 7.2% unemployment rate is well above any point since the early 90's, but nowhere near the dramatic rates of unemployment reached in the early 80's (Unemployment touched 9.7% in 1982). Unemployment in the double-digits, experienced during the Great Depression, seems a distant reality.

Rising unemployment places downward pressure on wages, an increasingly dangerous combination as the economy slumps and consumers pull back on their spending. Wall Street's reticence to maintain any semblance of an extended rally has resulted from the arresting drawdown in discretionary spending.

There was no silver lining in Friday's Labor report. Unemployment is showing no signs of abating or moderating, while government stimulus and expansionary monetary policy are exhibiting little relief at the ground level of the economy. Could unemployment reach double digits before the economy emerges from the current recession?