Unemployment Rate Is Political, but Not Necessarily Recessionary

The percentage of Americans who are out of work and looking for jobs hit a much higher than expected 6.1 percent in August, up 0.4 percentage points from July, the Bureau of Labor Statistics reported today.

This is nearly a five-year high—the last time unemployment was at 6.1 percent was September 2003. Then, a couple of years into an economic recovery, a New York Times editorial began: "Unemployment in America is high, and elections are on the horizon."

Sound familiar? Today, elections are more like at the next stoplight, but unemployment has clambered up and is again a ballot-box issue.

The politics: From Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission:

Hidden unemployment and wages lagging inflation make the economy the most important issue dogging Republican presidential nominee John McCain. Quite simply, ordinary Americans have not benefited from the strong GDP growth accomplished in recent years, and this gives Democratic candidate Barack Obama's proposals to redistribute income a lot of traction. These will not much help ordinary workers two years from now, but, in the heat of a campaign, populist policies and promises enjoy strong appeal.

Daniel Clifton, head of policy research for New York-based Strategas Research Partners, also said the jobs report "hurts McCain," according to Bloomberg.

The details: The U.S. economy has lost 605,000 nonfarm jobs since the start of the year. Jobs in auto-related manufacturing have decreased by 128,000 over the past 12 months. Last month, while jobs were added in computer and electronic products manufacturing, home-building-related jobs in furniture and wood products manufacturing dropped by 7,000.

Employment services lost 53,000 jobs last month. Healthcare and mining jobs were added.

The take-away for workers: Brian Wesbury and Robert Stein of First Trust Advisors say the fact that hours worked is down 0.6 percent suggests the "ugly" numbers are not recessionary: "Every recession in the past 40 years has had a decline of 3 percent or more." Also not recessionary: Average hourly earnings were up 0.4 percent.

From Wesbury and Stein:

Three main factors are causing labor market weakness: (1) intense problems in home building and energy-related industries; (2) the aging of the population, which has lowered the long-term trend in employment growth; and (3) a re-acceleration in productivity growth, which tends to cost jobs in the short run while raising living standards and jobs in the long run. The labor market is a lagging indicator of economic activity. Real GDP growth accelerated in Q2 and we believe will remain healthy in Q3/Q4. As a result, job losses will turn to gains before year end.