On August 1, the Labor Department reported the economy lost 51,000 payroll jobs in July, after losing 51,000 jobs in June. Economists expected a 75,000 loss in June. My forecast was for a 60,000 loss.

Governments added 25,000. Factoring out government employment, which is fairly steady in times of economic distress, the private sector bled 76,000 jobs.

Over the last seven months the economy has lost 463,000 jobs. The banking crisis, high oil prices and the large trade deficit with China are causing employers to relocate to Asia rather than endure in the U.S. Tsunami.

Wages and Unemployment

Wages increased a moderate 0.6 cents per hour, or 0.3%. Moderate wage and strong labor productivity growth should help keep core inflation in check, and this should help abate Federal Reserve concerns about nonfood and nonenergy price inflation, so-called core inflation, as it navigates the fallout from the subprime crisis. What problems the Fed faces in core inflation will be one-time pass-throughs from higher energy prices, not permanent increases in inflation expectations.

The unemployment rate was 5.7% in July, up from 5.5% in June. However, these numbers belie more fundamental weakness in the job market. Discouraged by a sluggish job market, many more adults are sitting on the sidelines, neither working nor looking for work, than when George Bush took the helm. Factoring in discouraged workers raises the unemployment rate to about to 7.1%. As the economy slows further, this figure will likely exceed 8% or even 9%.

Overall, the pace of employment growth indicates the economy is settling into a troubling malaise. Second quarter GDP growth was 1.9%, thanks to a bump to May consumer spending from the tax rebate stimulus package. However, retail sales fell off in June and preliminary data indicates that continued in July. Ford and GM have announced further production cutbacks, automakers are having difficulties securing credit to finance auto leases, builders have a 10 month supply of unsold new homes, and prices for existing homes fall month after month.

Auto production, housing starts and the market for existing homes will not improve much until 2009 or perhaps 2010, and those conditions will feed into the rest of the economy. The jobs outlook should not improve satisfactorily until at least mid 2009.

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