Investing Blog

You might think that a falling unemployment rate is a bad thing, but in actuality as unemployment dips and job losses continue, falling unemployment is TERRIBLE for the economy. Of course, like most indicators, much of the disparity comes from how we calculate the numbers.

Astute investors might have been wondering how the economy could shed well over 250,000 jobs but the unemployment rate fell. Well, its simple really, government statistics are calculated differently from the real world. Today’s unemployment rate, the percentage, not the number of monthly job losses, reflects the number of people who are receiving government unemployment benefits. These benefits last for six months, but often people are unemployed for far longer.

Why it is a problem

In true economic terms, the unemployment rate should never go down as more jobs are being lost. This just doesn’t make sense. But that comes down to how the numbers are calculated rather than what is actually happening.

Case in Point

The Associated Press reported that foreclosures in the United States rose 7% from June to July of this year. That is a staggering increase, and shows the power of marginal economics. You see, the number of people on federal unemployment benefits dropped by .1% to 9.4%, however, the number of people who are presently unemployed has gone up not down. What this means is that there are more people unemployed, all the while, less people are getting unemployment benefits.

Marginal Economics and Unemployment

It should only be expected that if job losses continue, and the unemployment rate dips, that the number of people no longer receiving unemployment benefits is going up and it is even more likely that those no longer receiving said benefits do not have a job. Looking back to the job losses of early 2009 shows 600,000+ jobs being shed each month. All of the people who were let go in January are, as of this month, no longer receiving state and federal benefits.

No Benefits, No Money

The missing link in the ongoing housing crisis is that for the next three months, we’re going to have at least 1.2 million people lose their unemployment benefits. That’s not good. That’s less people capable of paying their mortgage payment, as we see in the huge June to July growth in foreclosures. Marginal economics is tooting its deadly horn, it is clear that the foreclosure crisis is only going to get worse as more and more people lose all source of income!

Expect a continuation of the current trend

We’re at a cross roads where the biggest job losses of early 2009 will be putting even greater strain on the economy in the next few months. According to recent data, we’re going to pay the price now, and likely have a slight easing by February of next year, but that time couldn’t come soon enough. A flood of foreclosures is certain to happen over the next few months, further increasing supply of homes on the market and depressing prices.

Predictions for the months ahead

Home foreclosure is luckily a slow process, which only further delays statistics. However, that also adds to the length of the recovery by 60 days. I think we’ll see another surge in August, and an even greater bump in September as finally the January firings run out of money. The few that have a few thousand in savings and credit to last a few monthly payments may make it to November, but the job losses eight months prior to November look even worse.

Mutual Funds, Real Estate