June's Abysmal Jobs Report is Just the Beginning

By Kerri Shannon

The June jobs report was abysmal - bud sadly it's just the beginning.

After just a few months of modest, stimulus-induced improvement the jobs market is again sliding backwards into a "new normal" characterized by even higher rates of unemployment.

"Unfortunately, I expect chronic high unemployment to be with us for years, and to borrow a phrase from Bill Gross of PIMCO, that's the real ‘new normal,'" said Money Morning Chief Investment Strategist Keith Fitz-Gerald.

The dismal job growth boosted the unemployment rate to 9.2% in June from 9.1% the month prior. The labor force declined by 270,000, and the total amount of people out of work, including those who have stopped looking, is up to 16.2%, from 15.8% the month before.

"It is about as bad as anyone could imagine," Nigel Gault, chief U.S. economist for IHS Global Insight, told MarketWatch. "On face value it does suggest we are grinding to a halt," he said.

Indeed, the meager 18,000 jobs added in June actually led some analysts to question the report's accuracy.

"At first, when I heard it, I thought maybe they had announced the wrong numbers, they were so bad," Robert Brusca of Fact and Opinion Economics told CNN.

Economists had expected an increase of 125,000 jobs, just enough the economy needs to compensate for population growth.

Worse yet, May and April job numbers were revised to show results that were even worse than previously reported. The May gain of 54,000 jobs was lowered to 25,000, and the number of jobs added in April fell to 217,000 from 232,000.

"You look at the charts for private sector growth and you could see we were building a nice, steady crescendo," Brusca said. "All of a sudden the bottom fell out!"

The total number of unemployed workers who are actively looking for work is now 14.1 million, with 6.3 million out of work for six months or more.

Some economists had high hopes for the June jobs report, since alternate measures of employment statistics had shown promise. The ADP payrolls report last Thursday showed 157,000 private-sector jobs had been added.

But according to the Labor Department the private sector added just 54,000 jobs, and that gain was offset by a loss of 39,000 government jobs.

No More Jobs to Give

Private-sector employees account for 70% of the workforce. And as more government jobs are cut, private employment won't be able to bolster job numbers since it's experiencing a long-term slowdown of its own.

The new problem facing the workforce is not that U.S. companies don't have money to hire, it's that they don't need as many workers. Businesses are learning to survive with fewer employees, relying more on increased productivity and efficiency. When companies do have enough cash to spend, they put it toward new technology or M&A activity instead of hiring.

Companies have been regaining profitability, but the increase is not mirrored in the labor market, widening the gap between capital spending and employment.

"Today companies are producing more goods and services than ever before," said Bernard Baumohl, chief global economist at The Economic Outlook Group. "The GDP now is bigger than it ever has been before. And the economy is able to do that with 7 million fewer workers. If we can do so much with so much less, where is the incentive to hire?"

A Bank of America Merrill Lynch report released in March stated inventory rebuilding, low borrowing costs and equipment tax breaks had encouraged companies to spend - not hire.

And the companies that are hiring aren't doing so in the United States. They're looking elsewhere.

"America's stubbornly high unemployment rate is not likely to drop much in the future because - among other reasons - the biggest employers in this country have been exporting jobs overseas," said Money Morning Contributing Editor Shah Gilani. "General Electric Co. (NYSE: GE), Caterpillar Inc. (NYSE: CAT), and Cisco Systems Inc. (Nasdaq: CSCO), are just a few of the U.S. stalwarts that in the past decade have expanded their overseas operations at the expense of U.S. employment."

Jeffrey Immelt, GE's chief executive, told The Wall Street Journal that this shift doesn't reflect a relentless search for the lowest wages, but instead a search for active consumers.

"We've globalized around markets, not cheap labor," said Immelt. "The era of globalization around cheap labor is over," he said in a speech in Washington this spring. "Today we go to Brazil, we go to China, we go to India, because that's where the customers are."

What Investors Need to Watch

As the U.S. job market continues to disappoint, and U.S. companies shift their business focus to overseas markets, investors need to watch where the money goes.

"It doesn't take more than a quick glance to see that the capital flowing out of the United States and into other countries has been very beneficial for a lot of corporations," said Gilani. "Those are the corporations whose shares you should be buying."

Some of the companies with the best opportunities are those that invest in foreign consumer growth, as the United States continues to struggle with high unemployment and a rocky recovery. Netflix Inc. (Nasdaq: NFLX) is one of the latest companies to charge into emerging markets, announcing last week it will start service in 43 countries in Latin America and the Caribbean.

"Continue to buy global growth and global income because the U.S. is holding things back even as other markets with adult supervision charge ahead," said Money Morning's Fitz-Gerald.

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