11 Percent Unemployment?

I'm going to make an economic prediction - hey why not, everybody else does!

The Bureau of Labor Statistics July report puts the unemployment rate at 9.5% after a July net loss of 131,000 non-farm jobs. The private sector is credited with creating 71,000 jobs while government (at all levels) shed 59,000 jobs. The total government loss was 202,000 but 143,000 of them were temporary census workers. So the structural drop in government employment is 59,000 jobs.

The drop in government jobs reflects the budget cutting going on mostly at the state and local level to balance budgets. In New Jersey, we have seen it at the state level as this year was the first year I ever recall the state balancing the budget. At the local level, it seems that every town in the state is cutting payrolls to balance their budgets. This, by the way, has led to almost daily reports in the papers about what jobs were eliminated in what towns. In Morris Township, our budget was balanced in part by eliminating 16 positions and furloughing various groups of employees (essentially cutting their number of paid days in the year). The cuts hit all departments, including fire services, road maintenace, etc.

For fans of smaller government, this means that the economic crisis is a dream come true. State and local governments are getting smaller and services are being eliminated. It's just a matter of time before the same occurs at the Federal level. Also, since most (perhaps all) economists are predicting a long slow recovery in terms of job creation, I would expect unemployment to stay high as any growth in the private sector is likely to be matched or exceeded with declines in the public sector.

One thing that is unclear to me is the effect of the "Stimulus" of 2009 on the unemployment rate. The Congressional Budget Office has a wide range in it's calculation of how many jobs have been saved. But, I think that it's safe to say that the jobs being saved are in the private sector. After all, when they put stimulus dollars into fixing a road or funding a new industry, it is private sector contractors that get the government contracts to do the work. The range of CBO estimates is currently a low of 1.4 million jobs and a high of 3.4 million jobs. So how has that affected the unemployment rate?

The 9.5% unemployment rate is based on a count of 14.6 million people seeking jobs. Without the stimulus, this number would range from a low of 16 million to a high of 18 million, depending on which calculation of jobs saved is correct. Let's split the difference and say 17 million. If there had been no stimulus, then, the unemployment rate would be approximately 11%. Since all of the stimulus "projects" I have seen are of limited duration - once the road is built, the job goes away - it's effect on employment will diminish over time. Therefore, I would predict that unemployment will rise toward the 11% mark unless the private economy can get more steam without this government support.

Isn't that a cheery thought! BB