Unemployment Report, S&P Downgrade, Debt Ceiling, Stock Market... | AccountingWEB

Unemployment Report, S&P Downgrade, Debt Ceiling, Stock Market...

Wow, what a difficult period of economic information. I have been thinking all week just how I would try and summarize the events of the past several days and each day seemed to bring more news (mostly bad). 

As I posted last week, the debt ceiling compromise did indeed get done and with no tax increases. Of course, the ratings agencies have weighed in and did not think the spending cuts (if you really want to call a reduction from 8% spending increase to a 6% spending increase a cut) went far enough.
 
The stock market has been nervous and dropping with a threat of a downgrade looming. Then news that the government released second quarter growth was only at 1.3 percent annual rate and the first quarter was sharply revised down to 0.4 percent pace from 1.9 percent.
 
That news was followed by the unemployment report...which was not good. Here is now what is being called “The Brand New Scariest Jobs Chart Ever” (compliments of Chart of the Day):
 
 
We used to say that the chart showing the pace of this jobs "recovery" vs. all other jobs recoveries was the scariest jobs chart ever (see here for example). But we've since changed our mind.

This new chart shows the average duration of unemployment -- which surges without any sign of slowing down -- that's really scary right now. Not only is this number taking off like a rocket, but it potentially represents people permanently and structurally kept out of the jobs market.

 
The labor participation rate continues to decline. This measure of people who are either employed or actively looking for work declined last month from 64.1% to 63.9%. Why? People are so discouraged that they have given up looking for work. We witness that the number of discouraged workers rose from 982,000 in June (822,000 in May) to a whopping 1,119,000 last month.
 
What we are seeing is that the recession maybe never ended and if it did, we might be going back to a double dip. This of course had a huge impact on the market meltdown, where $2.5 trillion was wiped off global markets. Other factors that help cause last week’s downturn:
 
1. Meltdown in European sovereign debt.
2. The dysfunction in Washington
3. Unemployment staying high
4. GDP revisions and projections.
 
Now enter Standard and Poor’s rating Friday night, when they downgraded the US from top-tier AAA to one level lower AA-plus. What impact this has going forward is not certain. Many mutual funds do require only AAA grade bonds and now that US Treasuries are below that level, will there be a short term sell off?
 
On Saturday, China (one of our largest creditors) scolds us on the world stage stating the following:
 
"The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone."
 
"China, the largest creditor of the world's sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets."
 
"International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country."
If we do not cut spending and raise revenue (which I prefer we do by growing our economy), we will end up like Greece and be forced to make drastic cuts. Likewise, if we do not stop this continual money printing, we could end up like Argentina of 1989 (when they saw inflation reach 200% in one month).
It looks like a bumpy ride ahead, hang on tight.

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by Scott Heintzelman - Scott is a CPA, CMA and CFE living in Pennsylvania. Scott is a partner serving on the executive team at McKonly & Asbury LLP, a regional accounting firm with multiple offices in the Mid-Atlantic. The firm has been an IPA ALL-STAR as well as winning Best Places to Work in Pennsylvania for numerous years.

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