Unemployment Rate Rockets

Unemployment was reported up five-tenths in one month's time, to a rate of 5.5%. Now that makes sense... but "The Greek" says don't panic!

May's Employment Situation Report, released this morning, showed unemployment well above economist expectations for a 5.1% rate. When we were discussing the pending economic report last week, we seriously considered how little sense the forecast made. Unemployment has been gradually rising, but not dramatically so. It seemed due for a stronger rise, given all the corporate announcements of job cuts. This dramatic increase makes a whole lot more sense within the framework of the broader workings of the economy.

Here's what's going on...

We have noted in recent weeks, and on a radio program last weekend, that the unemployment rate has been understating reality. It fails to measure the "underemployed" or those who have lost their jobs, and replaced full-time work with part-time employment.

Most People Are Not Lazy

You see, most people are generally not lazy, nor do most obligations ease just because of job loss. So, when people lose their jobs, they typically collect unemployment, catch their breath, start a job search and eventually, take part-time employment. The government's metric does not capture those who are employed on only a part-time basis.

Here's what "The Greek" thinks might have partly driven such a dramatic rise in unemployment this past month. As more and more unemployed seek work from a limited and also decreasing number of part-time opportunities, eventually part-time capacity is filled. So, that leaves more people stuck in the unemployed category.

The basis for this theory is derived from the fact that those employed on a part-time basis due to economic reasons stayed at 5.2 million in May (from same level in April), while unemployment rose dramatically. Also, the number of part-time employed due to economic reason (lost their job) has risen 17% from a year ago. Drawing an analogy, this is like when a release valve has reached the limit of its usefulness, and tension is still high. There's not enough release valve flow opportunity to stop unemployment from exploding higher.

Those underemployed Americans are suffering similarly to the unemployed. Part-time jobs don't offer the same kind of income nor benefits as a full time job. Meanwhile supermarket and gasoline station expenditures continue to pound Americans, impacting consumption patterns. So, those considering the consumer sector for investment might also consider that; even so, the stocks will lead the economy in improvement, and that's an important fact that you should never forget.

Government Band-Aid Just in Time

We've yet another reason to pat the government on the back for the speedy delivery of the economic stimulus rebates. They'll come in handy for the newly unemployed, whether they spend it in Wal-Mart (NYSE: WMT) or to pay Consolidated Edison (NYSE: ED) for electricity.

Closer Inspection

Closer inspection of the government's report confirms our worst fears. Job losses mounted in the usual suspects of construction and manufacturing, but have spread to secondary sectors of the economy including retail trade and temporary help services. Yikes, we told you this would happen nearly a year ago.

As consumption declines, the retail sector finds that it is saturated. Consolidation has already begun, especially among the left out department store segment like Macy's (NYSE: M) and J.C. Penney (NYSE: JCP). Remember, we told you shoppers would migrate to discount, and that high-end would fair better than mall-based and department stores that draw middle America.

We also warned long ago that temporary help service providers would see troubled times, and that includes companies like Manpower (NYSE: MAN), Robert Half International (NYSE: RHI) and Korn/Ferry International (NYSE: KFY). Careful though, we also noticed a pick up of demand for temps when companies initially replaced more expensive workers with cheaper help in the form of temps and noncontracted freelance and consultant guys like me.

There are all kinds of pluses to the short term fix, including cheaper help and the avoidance of benefits costs. However, it looks like we're generally past the point where companies are usually in denial about economic downturn, and at a point where corporate managers are cutting costs frantically to meet a slashed budget.

Unemployment is now up a full percentage point from last year's 4.5% level. The number of unemployed who lost their jobs over the last five weeks rose by 31%. This is where economists missed the ball. Nonfarm payrolls fell 49,000, but average wage rates continued higher! The inflation lion roars!

Now, because employment is really a lagging indicator, as long as things don't get worse, the bravest of investors otherwise known as "smart money" may find further reason to buy stocks while the rest of you panic. After all, corporate profits that have suffered from declining revenues, now find respite thanks to cost reductions. However, heavy cost reductions at Ford (NYSE: F) and General Motors (NYSE: GM) did the two little good in saving Q2. Nobody can buy expensive durable goods now, especially when its harder to get a loan.

Oracle's Advice

Keep your heads. At the hour of publishing, the S&P 500 Index was down over 2%. Increased unemployment is not a surprise, though maybe it was a rude awakening for some overly enthusiastic optimists. Nothing has changed in "The Greek's" eyes regarding the economic environment. We expect the economy to drag through the year, mostly due to inflation that we think is underestimated by the Federal Reserve. Price increase will continue to burden Americans and thus limit the pace of economic recovery, and depending on how quickly the Fed realizes it, we could yet see recession as well. Beyond the basic forecasts, Iran and the complications we see highly possible, could significantly change our way of life. No economist at any large firm is willing to stick his neck out and tell you that, but afterward, it'll find its way into every economic forecast.

Keep reading "The Greek" to hear the unadulterated truth only possible from a truly independent research provider like me.

Please see our disclosure at the Wall Street Greek website. Article also interests AMEX: DIA, AMEX: SPY, AMEX: SDS, AMEX: QLD, AMEX: DOG, Nasdaq: QQQQ.