New Challenges to the U.S. Employment Problem

By: Hans_Wagner

The view of the employment numbers for September gives the impression that the economy is improving. The private sector is adding jobs even as the government reduces employment as census workers end their assignments. Looking deeper, the employment situation faces new challenges from state and local governments dealing with their revenue short falls.

September Unemployment
The private sector generated 67,000 new jobs in September indicating the economy is recovering at a slow pace. To absorb all the new entrants due to population growth, the economy must generate from 100,000 to 120,000 new jobs each month. Add in the more than 14 million people unemployed and about the same number underemployed and it is clear that the private sector must grow at a much faster pace to bring the unemployment rate down.

For September 2010, local governments cut 76,000 jobs, most of them teachers. That is the largest cut by local governments in 28 years. State governments shed 7,000 jobs.

State and Local Job Cuts
In 2009, 60 percent of state governments and nearly 42 percent of local governments laid off employees in 2009, according to a survey by the National Association of State Personnel Executives (NASPE).

With tax and other revenues down, states are also likely to continue hiring freezes and salary cuts that were in place in 2009, says NASPE director Leslie Scott. The layoffs and furloughs that characterized 2009 for state and local governments will accelerate as those governments respond to lower tax revenues in fiscal 2011 and 2012.

The cuts reflect the toll the recession is taking on state and local government budgets. Falling home values are just beginning to lower revenues from property taxes. Most state and local governments are required to balance their budget, which means drops in revenue forcing cuts in services.

State and local governments received a substantial portion of the $800 billion federal government stimulus money to help them avoid laying off teachers, firefighters and police.

Now state and local governments are cutting employees as they face declining revenues from lower retails sales and falling property values.

46 states face budget shortfalls for the fiscal year that begins July 2010. 39 states face shortfalls for 2012.

Vermont is the only state that does not require a balanced budget. Much of the shortfalls in 2009 were covered by allocations from the federal government, spending cuts and higher taxes. Now that the federal alloations are ending, states and local governments must balance their budgets on reduced revenues.

With falling home prices, any government that depends on property tax revenue will see falling revenues. Many property tax authorities reassess propeties every two years. The last time homes were assessed their values were more than 10% higher. When the assesser reevaluates these homes, the assigned values will be lower causing propety tax collections to drop. Governments that depend on these revenues will feel the sting of lower tax revenues. To balance their budgets, they will have to reduce spending including more layoffs.

So far, we have yet to see the significant number of layoffs from the state and local governments. It is only a matter of time when the cuts will begin to show up in the unemployment numbers, hampering economic growth. While mostly protected from the ravages of the recession now state and local workers will face the same difficult times many in the private sector found in the last several years.

Most local governments are one of the largest employers in their community. The affect of these loss of jobs over the next two years will devistate local economies.

In addition, state and local governments face unfunded pension payments that will further affect their annual budgets in the coming years. That is a topic for another time.

Since the economy suffers from a slow growth mode, the layoffs from state and especially local governments create new challenges for the economy. Consumer spending contributes about 70% of the GDP for the United States. The larger number of workers that will be looking for work will curtail consumer spending.

The Bottom Line
If you are counting on the economy generating enough new jobs to help power higher consumer spending, you will be disapointed. As state and especially local governments try to balance their budgets, the number of people losing their jobs will rise. Most investors have not included this ongoing event in their economic view. Expect a weaker economy over the next two years.

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

Copyright © 2010 Hans Wagner

If you wish to learn more on evaluating the market cycles, I suggest you read:

Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles by Joe Ellis is an excellent book on how to predict macro moves of the market.

Unexpected Returns: Understanding Secular Stock Market Cycles by Ed Easterling.  One of the best, easy-to-read, study of stock market cycles of which I know.

The Disciplined Trader: Developing Winning Attitudes by Mark Douglas.  Controlling ones attitudes and emotions are crucial if you are to be a successful trader.

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