A new Gallup poll says that “Six in 10 unemployed Americans say the next job they get is not likely to be one they want; instead, they’ll have to settle for one they don’t really want.”

People who do not like their jobs cannot move to ones they find more appealing. That will change when the recovery takes hold, even if that takes years. Then employees will do their best to migrate to the companies that they want to work for in the industries where they want to be employed.

This migration of people from one job to another will trigger a dangerous set of events. Companies have gotten used to having access to cheap labor. Firms have taken advantage of that to keep costs down. But, these companies have also taken the risk that these low-cost workers will leave as quickly as they can if they cannot get a raise or want to relocate to work they find more desirable. Some American firms will face a sudden surge in people who can and will quit. It will be expensive to replace those with employees with the proper skills. It will also be expensive to train new workers.

If worker satisfaction means anything to productivity, many companies will gain from an influx of people who will enjoy their work. These workers are also likely to have been displaced from the sectors in which they worked before the recession. That will be a benefit to many companies. They will see a return of “skilled” workers. That should have the effect of creating a more productive workforce at many companies.

Companies that have elected to drag the bottom of the employment barrel to find workers who were quickly dissatisfied will learn that short-term decisions make long term problems. Cheap gets expensive.

Douglas A. McIntyre

Very sharp stock market drops in the 1930s, followed by rebounds, are a reason that some years from that period make this list. The market rose 38% in 1935. It had, however, fallen 17% in 1929,  34% in 1930, and 52% in 1931. The 1935 rally was not so significant when put into that context. Economic cataclysms often distort equity values significantly, producing broad market gyrations that do not reflect economic reality.

It would be tempting, but simplistic, to say that the DJIA now faces the “law of large numbers,” which should prevent it from changing by significant amounts since it is near an all-time high. The DJIA peaked at 14,000  in October 2007 and will close 2010 at  about 11,600.  According to this assumption it would be  unlikely for the index to rise to 14,000 quickly or plunge by thousands of points.  Swings of this magnitude are almost unheard of.

It may be wrong to assume that the “law of large numbers”, applies to the Dow, actually. The DJIA rose from 6,600 in March 2009 to 11,200 in April of this year, an improvement of 68% in just over twelve months. The percentage movements in the DJIA sometimes have little to do with the raw number at which the index trades.

One of the most frequently cited reasons for the movement of the Dow is that traders bid the price of the index up or down based on their predictions about the economy six month in the future.  Some of the rebound rallies in the Depression sent wrong signals if that is true. It seems unlikely that the tremendous rally which ended this spring was an accurate predictor of the economy today, based on the current level of unemployment, slow GDP growth, and a deeply troubled housing market.

24/7 Wall St. obtained data on GDP growth from measuringworth.com, unemployment and CPI data from the Bureau of Labor,  Statistics, and historical Dow Jones prices from econstats.com. These are the ten greatest stock market years of the last century.

1915
Dow Jones Change: 81.7%
Dow Jones Close: 99.15
Real GDP Change: 13.87%
Unemployment:  8.5%
CPI Annual Change: 1%

Construction began on the Lincoln Memorial, Albert Einstein developed his theory of general relativity, and Alexander Graham Bell conducted the first successful transcontinental call. The Dow Jones increased more than 80% in a single year, the largest increase in the last century.

1919
Dow Jones Change: 30.5%
Dow Jones Close: 107.23
Real GDP Change: 0.8%
Unemployment: 1.4%
CPI Annual Change: 14.6%

Unemployment was only 1.4% for the year, one of the lowest rates during the 20th century. Rotary dial telephones were invented, and the Eighteenth Amendment made the sale of alcohol illegal in the United States. Prohibition began, and so did daylight savings time.

1928
Dow Jones Change: 48.2%
Dow Jones Close: 300.00
Real GDP Change: 6.05%
Unemployment: 4.2%
CPI Annual Change: -1.7%

In 1928, the roaring 20’s peaked, and the stock market hit new highs, nearly doubling over the course of the year. The Dow ended the year at 300.00, a level it would not reach again for 30 years. Herbert Hoover was elected, Penicillin was discovered, and Amelia Earhart flew across the Atlantic ocean.

1933
Dow Jones Change: 66.7%
Dow Jones Close: 99.90
Real GDP Change: 10.89%
Unemployment: 25.2%
CPI Annual Change: -5.1%

Following the end of the Great Depression, the United States economy improved significantly in 1933.  Franklin D. Roosevelt proposed New Deal programs, many of which would propel the country into recovery.  The Dow Jones increased a whopping 66.7%, up from the previous year’s close of 59.00.

The US stock market is back to pre-Lehman levels. Many companies are expected to report record earnings for the current quarter. The new tax structure, to a great extent the same as the old one, may have already started to lift consumer spending.

There are several powerful forces which are dangers to the recovery:

1. Spending Hangover

Consumers and business may have exhausted themselves in the fourth quarter. Shoppers have dipped into the savings they have made during the recession and may have begun to re-leverage themselves. That may cause a spending hangover in 2011.

2. Price of Oil

The price of oil has begun to push back toward $100 and gasoline prices have topped $3 per gallon for regular and $3.50 for premium. OPEC looks ready to hold production as it is. There are few reasons for cartel members to stop a trend which will make them richer than they already are. The Chinese appetite for crude and an unusually cold winter in the norther hemisphere will drive up demand.  Europe’s recovery is already threatened by cold and bad weather. And, largely forgotten among the other reasons for a shortage of crude, at least a temporary one, are the occasional periods of unrest in big oil producers like Nigeria.

3. Job Creation

There is still too few jobs being created in the American economy. The Fed has admitted that unemployment levels will stay above 9% next year. Small businesses are a critical engine for any recovery. Most have little access to bank credit which makes expansion very difficult. The notion of a jobless recovery only makes sense for so long. The consumer is still two-thirds of American GDP. “Normal” unemployment is about 5%. That is a level which may not be reached for years.

4. Bad Housing Market

The housing market is worse each month. Ten million US mortgages are still underwater. The people who own these homes have no access to equity loans. Research shows these homeowners are more likely to default. Potential buyers find it a challenge to get mortgages from banks. Those who can get this sort of credit think, the value of homes is still dropping. More inventory will hit the market as banks put nearly 2 million homes on the market as they complete the foreclosure process.

5. Earnings

Earnings may not be as good as expected. Bank earnings will almost certainly be down. Institutional activity is still slow and the same is true with M&A. Large financial firms still hold hundreds of billions of dollars in distressed assets. These include commercial loans and private equity transactions many of which may never regain their initial value.

6. Austerity

The notion of Austerity has become so prevalent in Europe that US politicians have begun to consider it. Congress was only willing to approve a new cap on the federal debt until March. There will be a war between the two parties over government spending. A large cut in federal funding for thousands of initiatives will almost certainly harm the public sector as it sheds jobs. That has already begun at the state level, and the states may become a blue print for Congress. Austerity measures in the UK will cost 400,000 government jobs. That number could be much larger in America.

7. Global Instability

The world is more unstable than it was a year ago. The most visible example of that is Korea. A war, no matter how small and contained it is, between the two Koreas would damage confidence that the world has become a safer place because potential trouble in the Middle East and Africa are contained. Korea was, until very recently, a part of the world that was considered stable.

8. Inflation

Commodities prices are up around the word. Crude oil is the most obvious example. Agricultural commodities are not mentioned as often, but cotton, soy beans, corn, and meats have each moved to nearly an all-time highs. Those prices will be passed on to businesses and consumers. If they cannot be, the companies which use them will suffer compressed margins which will lower both profits and capital expenditure. Inflation is still hiding for the most part, but it is only a quarter or two away from becoming a real problem.

9. Global Economy

The economies of several European nations could still collapse. This would have two immediate effects. The first is that consumers in the region may be over-taxed by their governments trying to reduce deficits. That would damage the flow of imports for consumer goods which is a challenge to both the US and Chinese economies. The sovereign debt of many eurozone nations is held by multinational banks. Defaults could cause another series of incredible bank losses like those the happened only two years ago.

A recovery from a deep recession does not look like past recoveries. That is said too often. But, now, it is forgotten in many circles that are nearly giddy with the prospect that the economy has started to improve that the challenges to this recovery are huge.

Douglas A. McIntyre

The number will likely increase by several hundred thousand people in the first quarter of next year. To understand the arithmetic behind the 2 million people whose support is at risk, the problem needs to be examined state-by-state. Based on research published by CBPP and the National Employment Law Project and interviews with CBPP’s Chief Economist Chad Stone and NELP policy analyst Rebecca Dixon, 24/7 Wall St. has examined unemployment insurance programs for each state and the potential losses to their residents should federal benefits run out.

Unemployment insurance is the government’s primary means of providing l help to people without jobs. States finance their own “Regular Program,” providing unemployment insurance benefits to residents for up to 26 weeks, which is typically based on a person’s earnings over a year.

Federal unemployment extensions, triggered after state coverage is exhausted, are provided through two programs, Emergency Unemployment Compensation (EUC) and extended benefits. The first to be triggered, EUC , gives up to 53 weeks of assistance based on the state’s unemployment rate. Extended benefits, which further supplements coverage after emergency compensation is exhausted, provides up to 20 weeks.

Although the extended benefits program is usually split 50/50 between the state and the federal governments, The American Reinvestment and Recovery Act of 2009 gave states the option to have the program financed entirely by the federal government. Twenty-seven states took advantage of this offer. This means that when federal funding ends, the extended benefits program in those states ends.

Another 10 states, including the seven on our list, elected to enact permanent extended benefits programs that are not dependent upon federal funding to be triggered.  As a result, these states can continue to cover up to 20 weeks of additional unemployment benefits.

What sets the Great Recession apart from other economic downturns is the huge numbers of unemployed and the length of time they are out of work.  Federal Reserve Chairman Ben Bernanke recently commented that “This is very unusual and very worrisome because people who are out of work for an extended period, their skills tend to erode.” That process of eroding skill along with an abiding hopelessness will only get worse as nearly 4 of 10 out of work Americans have been unemployed for over half a year.

Bernanke also observed what is obvious to most. The economy has grown slowly. Because it is uncertain how long it will continue, job creation has been nearly impossible. The jobless recovery has become no recovery at all. High unemployment weighs down consumer spending and business confidence, creating a vicious cycle which is not easily broken. The number of people who are chronically unemployed will grow and may do so for the next year or more until exports improve, the government embarks on more stimulus spending, or labor becomes so cheap that the hiring process begins again.

The debate about extending support to these 2 million people may not be over next year. The new Congress may decide to allow benefits to continue to lapse become providing additional support to the jobless would add tens of billions of dollars to the federal deficit, which politicians are not keen to do. The counter-argument is that people who are out of work are no longer consumers and become a burden on society.

Here is the 24/7 Wall St analysis of the two million person problem, focused on the ten states which account for over 70% of the total, and seven states where no benefits will run out this year. “All politics is local,” the late House Speaker Tip O’Neill said. It appears that is the case for the long-term unemployment issue as well.

The explanation for the high level of joblessness is clearly that the economies in may nations in the region are in a period of slow GDP growth or in some cases are shrinking. Unemployment is 20% in Spain, the high water mark in the region.

Economists want to know how quickly the unemployment number will move down to 7% or 8%, which is more manageable by national governments and a sign of an uptick in financial and industrial activity. Experts ask the same about the US.

Europe’s growth problems are not entirely part of the recession cycle. It may be that the austerity programs put in place by several nations have begun to perform badly even as they are in their infancy. Governments had hoped that lower expenses and higher taxes would close large deficits and bring down national debt. For some reason there was hope that these actions would not arrest growth in the private sector. It is difficult to see why anyone would believe that, but governments wanted to nonetheless.

Normally austerity and tax increases should not affect economies until they are fully in place. That is probably not the case in Europe, and may not be the case in Japan, or the US if the Administration and Congress follow other regions into a period of deficit reduction. Companies and individuals have obviously begun to act on expectations of what austerity will bring even before the impact has hit. Enterprises have probably begun to cut staff, or at least stop hiring, because of rising taxes. Consumers are likely to cut back as well.

Governments in Europe have economic models to show their parliaments showing what happens after almost every recession. Consumers normally pile up savings and pay down debts in the lean period which puts them in a position to become consumers again. Expense reduction improves company profits and balance sheets. They then hire as economic activity improves.

Few consumers or businesses are fooled by the talk that austerity does not bring an economic slowdown. That means whatever recovery that might have been afoot in Europe will be trampled.

Douglas A. McIntyre

A Bureau of Labor Statistics report for July unemployment by region and city shows that some of the hardest hit states added jobs from June 2010 to July 2010. The jobless rate improved in 37 states, based on non-farm payroll data, while it worsened in 13 states.

Michigan, battered by the downturn in the car industry, added 27,800 jobs, perhaps due to auto companies slightly increasing production as their sales have improved. Massachusetts added 13,200 jobs, and New York added 10.500 jobs.

But, several hard hit states showed a worsening of their jobs situation as the July figures were compared with July 2009. Nevada’s jobless rate rose to 14.3% from 12.3%. It now has the higher unemployment rate of any state, driven primarily be a drop in jobs in the gaming business and in construction. Real estate price have dropped in Las Vegas more than any other large city over the last year.

Michigan still has the second highest unemployment rate at 13.1% followed by California at 12.3%.

The data show that although there have been modest recoveries in the number of unemployed in some regions, the states most badly damaged by the recession have high enough jobless rates that it may take them years to recover to the “normal” rate that economists use as a benchmark–about 5%

These badly hurt states are also a petri dish for the success of federal jobs programs, or lack thereof, as the number of chronically unemployed people grow. Nearly 1.5 million Americans have been out of work for over 99 weeks and have exhausted all of their unemployment insurance.

Whatever the government as attempted to do, it cannot retrain people with manufacturing and construction skills. At least, it cannot do so at any perceptible pace.

Douglas A. McIntyre

Most of these states are in a doing very poorly.  And things are not improving very much, if at all. Their costs to maintain roads, public services, and social services have not dropped since the beginning of the recession. The burden of low receipts into their treasuries has gotten so great that many state employees are being laid off, further compounding the problem.

Two states that most people will not be surprised are on the list are Michigan, bludgeoned by the deep depression in the auto industry, and Nevada, hurt by a collapse of construction due to falling real estate prices and a loss of jobs in the cyclical gaming industry.

1. Michigan. The unemployment rate in Michigan was 13.2% and has averaged 14% in the first half of the year. The crippled auto industry’s problems have also hit auto suppliers and municipal budgets. The state and a number of large cities have fired workers. Flint, one of the largest cities in the state, is in receivership.

2. Nevada. The state’s 14.2% unemployment rate in June was the highest in the nation. Nevada is unusual because its jobless rate has continued to rise as the national unemployment rate has fallen slightly. The casino business relies heavily on discretionary spending, which has dropped as the economy has worsened. Home prices have been halved in many sections of Nevada, putting a significant part of the construction industry out of work, as the real estate bubble burst.

3. Illinois. Unemployment in the large industrial state was 10.4% and has averaged over 11% for the first five months of the year. Illinois has been because it was home to many manufacturers. Manufacturing productivity in the state has typically been more than $100 billion. Chicago is the “second city” after New York in the financial services industry, another sector badly damaged by the credit crisis.

4. Rhode Island. One of the smallest states in America, both in size and population, had an unemployment rate of 12% in June and averaged over 12.3% for the first five months. Rhode Island has little more than one million people. Providence, Warwick and Cranston, among the largest cities in the state, have been manufacturing centers for decades. And the state’s second largest industry is tourism, which has been damaged by a steep cutback in travel.

The market tends to look at unemployment as a single number–9.5% or less than 10%. It is going in the right direction. The jobs problem will improve  in a few months, or a year.

But, the best bellwether for the future of employment in the US may be the statistic, rarely touted as important, of the number of jobs for every person looking.The jobs-to-worker number got up to 6% or so at the depth of the recession, but is has not improved over the last few months. The BLS reacted to the latest numbers by reporting that “Even with the gains since July 2009, the number of job openings in May 2010 remained below those in place at the start of the recession.” In other words. the picture has not improved a lot.

The jobs-to-worker figure is important in another way. Jobs that are not open, to put it inelegantly, mean people can assume that the hope of finding work is small. There is already a great concern growing among economists that long-term unemployment could drag down the economy as it tries to take flight. The unemployed who have been out of work beyond the period when the government will support them cannot be consumers. Rather they are often a burden on their relatives and on the private institutions–churches, homeless shelters, and community centers–who do what they can to replace the government’s safety net. These long-suffering unemployed eventually fall into the category of those not looking.

The problem with those not working is that eventually they start looking again.  As job openings increase, so will the number of  job seekers. It is a vicious circle of people going in and out of the workforce competing for open jobs with jobs with too many candidates. As the number of people who want a job rises or stays steady over the next few quarters, it may overwhelm a slight recovery in hiring.

There may be 4.7 people looked for every open job. That number should fall during a recovery, but simple math shows that may not happen.

Douglas A. McIntyre

Total job growth dropped in June for the first time in 2010 as nearly 250,000 temporary census workers lost jobs, the Labor Department reported. Private sector payrolls expanded by a only 83,000 in June.  Economists expected the figure to be closer to 150,000.  The unemployment rate dropped to 9.5% in June from 9.7% in May. There was a breathtaking 652,000 decline in the labor force in June.Non-farm payrolls fell 125,000 Experts expected the unemployment rate to stay at 9.5%The news adds to a string of remarkably bad news which has been released by both the public and private sector in the last 30 days and is an indication the expansion, which look so hopeful in March, April, and May has either faltered or reversed itself

ADP and Challenger Christian jobs data were both disappoints. Anticipated sales of new homes dropped 30% in May despite record low mortgage interest rates. And The Conference Board indicator of consumer confidence fell sharply

The Administration is now left with the stark problem that its $787 billion aid package has not stimulated the economy or added the 3 million jobs that it has promised. The political environment is such that putting a new stimulus package through Congress, even a very modest one, is impossible. The House and Senate have even been skittish about extending unemployment benefits for almost 1.3 million of the unemployed because the CBO says the cost of the decision would be $33 billion.

Obama finds himself in the middle of the debate about how to best solve the stagnation of the US economy. He can take the Angela Merkel route of pushing austerity which puts long term deficit reduction ahead of rapid growth, or the French approach which is that stimulus money is still needed to keep a recession from washing over Europe.

Experts and both the IMF and World Bank said that they are in favor of governments adding to their stimulus packages. But, Obama cannot get Americans to accept that math.

The problem is particularly severe, beyond the human suffering, because 4.34% of the civilian workforce has been out of work for 26 week. That is almost 6.72 million citizens. Many state benefits run out after 26 weeks, so the federal program is all this is left.

Passage of the pending bill required a two-thirds majority and the final tally was 261 for and 155 against. Not enough. The cost of the legislation is estimated at $33 billion. That money is available inexpensively now, in theory, as investors rush to buy US paper as a safe haven and the Treasury’s borrowing costs fall.

A year and a half ago when the $787 billion stimulus bill was passed, a $33 billion addition would have seemed nearly unimportant. The rising deficit and calls for austerity in nations around the globe have put the Administration and Congress back on their heels. Voters are becoming more anti-spending by the day, and members of Congress are worried about the mid-term election.

All of that is old news. What is not is the growing question about what happens when several million Americans are without any means of financial support at all?Tax increases are often viewed as regressive. The basic argument is that higher taxes gives people less incentive to make money and increase their incomes. Total receipts to the IRS fall. The government has undermined the incentives that cause improvement in GDP. This argument is being made across Europe as countries raise taxes and cut government spending. There is no right side to the regressive taxation issue.

Cuts in government spending have the potential of being regressive as well. A decision to stop paying unemployment benefits could save $33 billion and help shrink the deficit very modestly over the next several years. Any slowing of the growth of the deficit may also slow increases in the national debt. On paper, these  cost cuts made by the federal government look attractive.

When more than a million people go from having a very modest income to none at all and another three or four million people are facing a similar fate, the consequences to the economy can be serious. The unemployed do not spend much to keep up GDP advancement, but the figure is meaningful when spread across millions of citizens.

The ripple effect from the decision not to pass the unemployment bill is also powerful. For the one in ten Americans who are unemployed, there are probably another one or two worried about keeping their jobs. As the economy appears to slow, that anxiety increases. People who may lose their jobs and any public safety net that helps support those out of work will cut spending to create a financial cushion. That process is an enemy of GDP growth.

There in no compelling set of numbers that show the failure to extend unemployment benefits will cost the federal government $33 billion in receipts.  There are none that prove that some businesses need the patronage of people who rely on their unemployment checks to maintain profits and number of employees that they keep.

Congress is setting aside an issue that is expedient to set aside now. It will not sit on shelf for very long, however.

Douglas A. McIntyre