Job losses slow in May, but unemployment hits 9.4 percent

More progress in the long journey back to economic health. The U.S. economy lost 'only' 345,000 jobs in May, the U.S. Labor Department announced Friday, with the nation's unemployment rate rising to 9.4 percent, the highest rate since 1982. But the job loss total was considerably less than expected for the second straight month, providing more evidence that layoffs may have peaked in the world's largest economy.

It was the lowest monthly job loss total in eight months. A Bloomberg News economists survey had forecast the economy to shed 530,000 jobs in May and the unemployment rate to rise to 9.2 percent. The economy lost 539,000 jobs in April and 699,000 jobs in March.

Every major sector except health care and government experienced a loss of jobs. Goods-producing industries lost 225,000 jobs, manufacturing lost 156,000, construction saw 59,000 jobs pared, and retail lost 17,500 jobs. Two bright spots, as has been the case for several months: health care, which added 36,000 jobs, and government, which tacked on 22,000.

What's more, the nation's economy has now shed roughly 6.0 million jobs since the recession started in December 2007, and 4.6 million jobs in the last seven months.

Further, a separate unemployment gauge, which includes workers who can find only part-time work and discouraged workers, rose to a record in 16.4 percent in May from 15.8 percent in April. That index was at 15.6 percent in March. What's more, the number of workers forced to work part-time because they can not secure full-time work increased 164,000 in May to 9.1 million.

Have job losses peaked?

Is the worst of the recession, from a job-loss standpoint, finally behind the nation? The May data is encouraging, but many economists say several more months of steadily-lower monthly job losses will be needed to confirm the trend. A double-dip recession -- where job losses fall, only to rise again -- has occurred in selected economic downturns in the modern era.

Then there is the "L-shaped" recovery, or not much of a recovery at all -- where job losses subside, but substantial job gains do not occur. The later is almost as bad as a recession: the U.S. economy has to create about 200,000 jobs per month -- a roughly net 100,000 job gain over the monthly gain needed to keep unemployment from rising -- for the next 5 years, just to replace the roughly 6.0 million jobs lost during the recession.

Economists say fewer lay-offs mean that consumer spending declines will likely abate -- provided Americans resume a normal consumption pattern. Right now, the "frugal consumer" dominates: the U.S. savings rate is at a 14-year high of 5.7 percent.

Think tanks divided on job creators

And, as most investors might sense, economic think tanks vary on what's needed to enable the U.S. economy to create jobs.

The Heritage Foundation, a conservative think tank, argues that the larger role the U.S. government is playing in the economy as a result of measures to stem the financial crisis and to increase spending on infrastructure will lower job growth by reducing the diversification of investment, dis-empowering individuals, and diminishing entrepreneurial capital.

Conversely, the Center on Budget and Policy Priorities, a primarily-liberal think tank, argues that fiscal stimulus spending is working as intended. In addition to creating jobs via needed infrastructure projects, federal grants to towns and counties are saving jobs by preventing cuts in essential public services (police, fire fighter, and teacher jobs), thus maintaining some demand in the weak U.S. economy.

Wachovia Chief Economist John Silva calculates that the worst of the nation's job losses are over, but cautions investors not to conflate that with an immediate return to impressive growth. "The worst is over for the job market and for the economy" Silva told Bloomberg News Friday. "It'll still be a tough environment. Firms are going to be cutting through the end of 2009, and it'll take time for all those jobs to come back."

Indeed, investors should not expect a quick reduction in the unemployment rate, even if above-trend, or strong, U.S. economic growth resumes. That's because unemployment is a lag indicator: it will likely continue to rise for a half-year -- perhaps as long as 12 months -- even after the U.S. economy starts to recover, as companies first use existing capacity to ramp-up production, then later add employees as demand strengthens.

Also in May, average hourly earnings rose by 2 cents to $18.54. In addition, the number of people who've been out of work longer than six months increased 268,000 to 3.9 million -- or to 2.5 percent of the workforce, the highest percentage for that stat since 1983.

Economic Analysis: It appears the economy is heading in the correct direction, from a job loss standpoint, with the emphasis on "appears." A "knock on wood" is added because more than one downcycle has bottomed, recovered slightly, only to see lay-offs rise again. What's clear is that the U.S. economy is undergoing a major restructuring, losing real estate, manufacturing, retail, and financial services jobs, while adding new jobs in the health care services, information technology, infrastructure, education, renewable energy, and biotech sectors.

Historically, the U.S.'s economic system has proven to be remarkably flexible and resilient -- able to withstand losses of whole sectors and, via ingenuity and new technologies, create new engines of both GDP growth and job growth. Still, economists caution that no two recovery cycles are identical and this cycle -- the globalization era with its lower cost structure -- will present the toughest hurdles for the nation's job creation machine since the demobilization at the end of World War II.

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