Recession red zone?

The May jobs report came as something of a shock to most observers. The consensus expectation had been for roughly 150,000 new jobs to be created, continuing the modest growth of the first quarter. Instead, companies added only 69,000 positions. Worse, the figures for March and April were revised downward by 49,000 jobs, so earlier cautious optimism was unwarranted. Those who argued that the strong job numbers earlier this year were attributable to the unusually warm winter, which resulted in an acceleration of some economic activity, retreated. Most observers conceded that the economy is slowing, and will likely miss the optimistic targets forecast as the year began.

Additional data points:

• The labor force participation rate edged higher, which resulted in an increase in the unemployment rate to 8.2%.

• Unemployment would be far worse, but for the fact that so many people have stopped looking. If the labor force participation rate were the same today as when President Obama took office, the unemployment rate would be 10.9%.

• Unemployment has been above 8% for 40 consecutive months, the longest such period since the Great Depression.

• The broader unemployment measure, which includes underemployed people who are looking for full-time work, rose to 14.8%.

Stocks fell sharply on the news, with the Dow Jones Industrial Average giving up all its gains of 2012. We seem to be in a danger zone, in which the economy might easily slip into recession. Last year the economy grew at just 1.7%. According to Federal Reserve research, when GDP grows by less than 2% there is a 70% chance of recession within a year, based upon economic history since 1947. When our weakness is coupled with Europe’s sovereign debt crisis and the economic slowing in China and India, there are not many rays of hope.

(June 2012)