Unemployment Primed to Accelerate

For the time being, employment losses have slowed and the official unemployment rate has firmed around the 10% level. The media offers encouragement that a slow recovery is underway. But now the focus is starting to shift toward large and growing state and local government deficits. Revenue continues to fall from previous levels leading to unprecedented budget shortfalls. The construction and retail sectors took their lumps over the past year. The next round of pain will result from massive layoffs in the public sector.

CNN Money reports that states are looking at a $180 billion budget gap for fiscal 2011, beginning July 1st for most states. To close the gap, state workers will face layoffs or cuts in salary and benefits.

States are looking at a total budget gap of $180 billion for fiscal 2011, which for most of them begins July 1. These cuts could lead to a loss of 900,000 jobs, according to Mark Zandi, chief economist of Moody's Economy.com.

Newly elected Governor Christie stated he plans to freeze $1.6 billion including $475 million in school aid. Citing a potential shortfall of $1 billion, Louisiana Governor Bobby Jindal is calling for the elimination of 3000 state jobs that would call for 1000 layoffs. In San Bernardino, a local school district plans to cut 110 positions to help slash $30.7 million of the budget.

Detroit mayor Dave Bing is lobbying the Obama administration for $500M-$1B in federal aid.

Detroit Mayor Dave Bing says he is seeking $500 million to $1 billion from the federal government for efforts to bolster job growth, eradicate blight and address illiteracy and poverty.

Good luck with obtaining that, Mr. former NBA guard turned politician.

As you can see, everyone needs (wants) federal money. Without a federal bailout, the alternative is to cut back on services and force public employees to hit the pavement - teachers, policemen, firemen, medical personnel, and social workers. The federal government must weigh the political decision of forcing states to  undertake austere measures necessary to get their budgets under control versus bailouts that add to the national debt. Zero Hedge posted a brilliant analysis on the impact of interest payments on the national debt as a function of interest rates. It's well worth your time to read this article.

If the federal government does not send billions of dollars to the states, it is clear that we will see an acceleration in unemployment numbers soon. However, if the federal government placates state governors, the cuts will not be made and we will find ourselves at the same place one year later.

For politicians, self-survival is paramount. Most likely, Washington will decline state overtures for now, as the public has grown weary of bailouts. As layoffs mount and media begin to focus on starving ex-teachers and ex-policemen facing foreclosure, I suspect the public will want to be given the same  handouts from Washington that banks and large corporations such as GM and AIG have received.  Obama will give an impassioned speech and Congress will pass an emergency rescue bill.