Unemployment Falls, Disappoints Analysts

The Federal Reserve has made it clear that it will continue its policies of bond and mortgage-backed securities purchasing until US unemployment falls below 6.5% and that withdrawal of support will be a gradual process that will not be triggered until the threshold is reached and depending on current circumstances.

The July figure for unemployment came in at 7.4% which represented a fall of 0.2% over the June level for the non-farm payroll. The US economy created an additional 162000 jobs last month according to the US Department of Labor, but analysts had expected the figure to come in at the 180000 mark, so again, the US recovery has proved weaker than anticipated. The situation was not helped by the downwards revision of the May and June unemployment estimates. Data for job creation in May was revised down from 19500 to 176000 which is a sizeable correction. Job creation data for June was trimmed from an initial estimate of 195000 to a final figure of 188000. On the more positive side, 7.4% unemployment is the lowest level that the US economy has seen for four years and is clearly a step in the right direction. The creation of jobs within the US economy has been steady rather than stunning – unemployment has fallen from 8.1% last August to its current level of 7.4%.

Unemployment is a lagging indicator of the economic cycle since businesses only expand their workforce when they are convinced that it is justified to meet forthcoming demand.

Consumer spending in the States picked up in June, but only by a modest 0.5% which indicates that consumers continue to be careful with their cash and are yet to be convinced that the good times have arrived. Equally, inflation was up, but is still only running at 1.3% which is significantly below the target rate of 2% that the Federal Reserve believes to be healthy for the economy.