Unemployment spike and oil price surge point to deepening recession

The May unemployment rate spiked 0.5% to 5.5%,from 5.0% in April, in the largest one-month rise in over two decades. This rise taken from the so called household survey is a response to an horrendous 861,000 May jump in the number of unemployed, well in excess of an outsized 577,000 May rise in the labor force. This unemployment rise reflects students and other new entrants to the labor force, including returning workers, as well as the newly unemployed. In addition to the 8.5 million now unemployed, there are some 5.2 million workers who could not find the full time employment they were seeking and were forced by economic circumstances to instead take part-time employment.

The worsening unemployment situation in the household survey undoubtedly more accurately mirrors the intensifying recession than the milder deterioration in the establishment payroll survey. For example, in the payroll survey nonfarm employment declined by 49,000 in May. But nonfarm payrolls are partly estimated by assuming that new and small companies that are not actually surveyed are hiring. As a result of such estimates, the payroll survey tends to lag the household survey in recognizing economic turning points. The payroll survey appears to be doing exactly that currently, underestimating the severity of the falloff in employment.

There is a risk that the sharp spike in the unemployment rate to 5.5% in May may have been partially boosted by improper seasonal adjustement. If that turns out to true there could be a partial 0.1 percentage point reversal in the next month or two. However, the trend path of the unemployment rate is decidedly up, and should hit 6.0% by year-end or early next year.

The index of aggregate hours worked was 107.1 in May and 107.2 April, down from 107.6in March, suggesting weaker GDP growth in the second quarter than in the first quarter and perhaps negative growth.

As if it were not enough that there is a continuing housing depression, credit crunch and mounting financial institution losses which threaten to top %400 billion, oil and other key commodity prices are spurting upward. The record setting rise in oil prices last week poses a serious threat to consumer discretionary spending. It is no wonder that the combination of the spike in the unemployment rate and oil prices contibuted to a sell-off in equities, renewed expectations of further Fed easing, a new decline in the dollar and a modest dip in Treasury yields. With a credible near term forecast of oil prices at $150 and not too far off at $200, speculators are piling on the trade, rapidly pushing prices toward those objectives.
Even at lower oil prices, the consumer will be forced to cut nonenergy and food related spending. That in turn will cut the profitably of discretionary consumer product and services companies. Truckers and airlines are already suffering profoundly. The worsening consumer led recession will eventually supress demand sufficiently to contain inflation.


Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport New York 11731

philipbraverman@Gmail.com