July’s Employment Situation Research Notes

by Jim Baird on August 6, 2012

Unemployment rate rises again, despite better job creation in July

There was some marginal improvement in the estimated pace of job creation in June, as the economy added 163,000 new jobs.  However, the unemployment rate backed up for the second time in three months, ending the month at 8.3%.  Better-than-expected job growth may ease concerns related to the jobs market that have built over the last several months. Nonetheless, job creation remains well below the pace needed over a sustained period to meaningfully reduce the jobless rate.

The jobless rate has been effectively treading water since the beginning of the year.  While the unemployment rate declined slowly but relatively steadily in 2010 and 2011, very little progress has been made this year.  Moreover, the uptick the unemployment rate in the past four months has reinforced the perception that the already lackluster expansion is threatened.

The weakening economy presents a dilemma for investors, as corporate earnings growth has stalled and risks are elevated.  The potential certainly exists for the Fed to once again step in and provide additional stimulus in an attempt to boost economic activity.  That potential outcome is, to some degree, already baked into the cake.  Should the Fed fail to act in the timeframe the market expects – or if such actions are less impactful than hoped – markets could certainly react negatively.  This puts investor sentiment in a delicate position, and we anticipate the recent lull in market volatility could be short-lived.

Consumers gathered confidence at the beginning of the year, as stronger than expected jobs numbers provided a boost to confidence and a corresponding bump in consumer spending.  However, as evidence of broad economic weakness continues to mount, consumer confidence continues to slide.  Consumers have been curtailing spending, and the ripple effects of tighter purse strings are likely to be felt in the months ahead.

The bottom line is that, despite an uptick in job creation in July, the jobs market remains lackluster, consistent with an economy that is struggling to sustain momentum and remains quite fragile.

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