False dawn

US jobs: Optimism over the small decline in the US unemployment rate is premature. The stock market enjoyed a mini-rally after the government reported that the jobless rate had fallen to 9.4% from 9.5%. But this was caused by a decline in the labour force, which is not a sign of economic revival. The fiscal and monetary mess could lead to a halting recovery with ongoing job losses.

July’s 247,000 job losses were broadly spread. Only healthcare showed 20,000 job gains. Construction jobs declined 76,000, less than in the early months of the year, as home building has begun to stabilise. Manufacturing lost only 52,000 jobs, far less than in previous months, but that reflected unusual seasonal factors. So many automobile workers have already been laid off that the July plant shutdown was smaller than usual, producing an artificial 28,000 seasonally adjusted “gain” in car-sector employment.

Although the number of people employed declined, the unemployment rate (calculated via a household survey) also fell because the labour force shrank by 422,000 individuals. This reflected an increased in the number of workers “marginally attached to the labour force” who have not looked for work in the past 12 months, up by 709,000 in the past 12 months to 2.3m. The labour force participation rate (those who are either employed or unemployed but seeking work) has fallen by 1.3% since July 2008.

Going forward, employment will be slow to recover. In the coming quarter, automobile production and employment may benefit from the “cash for clunkers” programme, but that will mostly pull production forward from future quarters.

Two factors will hold the economy back. Monetary policy has been extremely stimulative, with excess reserves in the banking system now totalling $700bn. The Federal Reserve will have to tighten as price pressures increase. In long-term bond markets, federal budget deficits of over 10% of GDP in 2009 and 2010 are already beginning to push rates up, and this will be exacerbated as economic activity begins to strengthen.

The decline in employment has slowed, but the US may not see substantial net job creation for some time.