U.S. Labor Market on the Rebound?

The numbers are in folks: the U.S. labor market improved in July! Last Friday, the non-farm payrolls revealed some good news for the U.S. It showed that net hiring increased by a solid 117,000 in July, significantly better than the projected 89,000 increase. Additionally, June’s figure was revised upwards to 46,000 from 18,000.

As for the unemployment rate, or the percentage of people who want to work but can’t find a job, edged lower to 9.1% from 9.2%.

Good news, right?

Some will probably say yes, but a closer look at the employment report will reveal weak spots in the U.S. labor market. The reduction in the unemployment rate wasn’t actually an increase in people with jobs but rather a decrease in the people looking for jobs.

In other words, it the decline actually reflected the percentage who just got discouraged looking for jobs and simply… well, stopped. Sometimes, no matter how determined you are to get a job, it just won’t matter when there simply aren’t any openings!

The broader measure of unemployment which also includes the discouraged workers who exited the labor force and part-time employees who would like to work full time was actually at a whopping 16.1 % in July.

Despite these sore spots, the upbeat headline figures were more than enough to convince traders and their mommas that the U.S. labor market ain’t so down in the dumps after all. It’s bad enough that the U.S. is facing the possibility of a debt default, after credit rating agency S&P downgraded U.S. debt, yet the NFP report provided a temporary relief. In fact, it seemed to soothe fears of another recession in the U.S.

With that improvement in the unemployment rate, the U.S. probably won’t need another round of quantitative easing anymore, would it?

Well, it may still be too early to tell but at least the U.S. has one less problem to worry about now. Bear in mind that the Fed doesn’t have much room for additional stimulus since the government is already burdened by a high public debt and U.S. interest rates are so close to zero.

Simply put, the U.S. cannot really afford to slip into another recession. President Obama himself acknowledged the urgency of boosting the U.S. economy by creating more jobs. In particular, he announced his plan to encourage hiring of veterans and offering tax credits for companies that do so. But at what cost? More government programs and tax incentives means more spending, which translates to more borrowing.

At this point, the U.S. is left with less monetary policy tools and financial means to save itself. The next few months could be a crucial period for the U.S. economy so let’s wait and see what other tricks the Fed and the U.S. government can come up with.