• A total of 2.6 million jobs lost in 2008 – the most since World War II.
• A jobless rate that’s at 7.2% – and climbing.
• About 11 million people out of work.

As usual, however, the “official” numbers don’t tell the entire story.

“People say that they know how bad the economy is. But they don’t know how it feels to have the reality hit home,” said Stu Schweitzer, global markets strategist at J.P. Morgan Chase & Co.’s Private Bank (JPM). “It’s not the facts — it’s how the facts feel. And it feels terrible to have so many Americans losing jobs, and so many more likely to follow in the coming months.”

As it did last week with the government’s inflation statistics, Money Morning will now take an in-depth look at how the U.S. jobless situation may be a lot worse than the U.S. government statistics appear to show.

And “how it feels” comes home to roost with a behind-the-scenes look at the dramatic impact those horrific numbers have on the lives of just a few people caught in the crossfire.

Government Unemployment Numbers — Not What They Seem

The official government estimates of the current unemployment problem are staggering in their own right.

• 791,000 manufacturing jobs were lost in 2008, hitting the auto sector hardest.
• 260,110 people lost jobs in the financial sector, part of the overall service sector that accounts for some 80% of all employment.
• The construction sector shed 899,000 since peaking in September 2006.
• The retail sector shed 522,000 jobs for all of 2008.

All told, 2.6 million people lost their jobs in 2008. And, to underscore the accelerating nature of the problem, more than half of those job losses occurred in the final four months of the year. In December, a total of 11.1 million were unemployed. An additional 8 million people were working part time – up sharply from 7.3 million in November.

The average workweek in December fell to 33.3 hours. That’s the lowest average on record, dating back to 1964, and a sign of more job reductions to come since businesses often cut hours before eliminating positions entirely.

Those are the “official” government numbers. But, as a closer look demonstrates, the unemployment figures can be understated – and misleading.
The government actually compiles unemployment figures in six different categories; as you might expect, the numbers tend to minimize the bad news.
The most commonly number quoted in the media is the “official” unemployment rate – known as U3 (the bottom line of the three in the chart below) – which now stands at 7.2%.

But to get the real picture, you have to add both in what the government refers to as “discouraged” workers (U4) and “marginally attached” workers (U5) – those who have stopped looking for work, or who haven’t looked for work recently (represented by the middle line of the three in the chart).  That number (U6) depicts an unemployment rate t that’s approaching an eye-popping 14%.

And it gets worse.

If you include the people that the government doesn’t even count – such as unemployed farm workers, the idle self-employed, and workers in private homes – the unemployment rate approaches an astonishing 18% (top line).

In other words, unemployment has insidiously spread to almost one-fifth of the U.S. work force, a number much larger than the single-digit figure commonly bandied about in the press.

If you regard unemployment statistics as an important means of gauging the overall health of a given economy, these “enhanced” statistics paint an ugly picture of just how painful this financial slump has become for the U.S. economy.

Layoffs of this magnitude are more than a mere shot across the bow of the economy; they’re actually a direct hit amid ship – below the water line, meaning that sinking is inevitable.

Fully 70% of all domestic economic activity is powered by consumer spending. People who are unemployed cannot buy homes, don’t shop heavily in retail stores, cut back on groceries, and are loath to take on added risk.

The numbers alone are bad enough.  But in America’s heartland, many of the approximately 80% of workers thatarestill working are caught in the grip of unemployment vise as well.

No Runs, No Hits, Many Errors

Not only are record numbers of Americans suffering without jobs – they can’t even tell their troubles to a human being anymore. Most now have to navigate hard-to-use electronic systems, faceless entities that are ill-prepared to help so many people file for much-needed unemployment benefits.

With about 4.5 million Americans collecting jobless benefits, state government web sites and phone systems used to file for benefits are being overwhelmed by sheer numbers.

Electronic unemployment filing systems have crashed in at least three states amid an unprecedented crush of thousands of newly jobless Americans seeking benefits. Other states are adjusting their systems to avoid being next, The Associated Press reported.

Systems in New York, North Carolina and Ohio were shut down completely in early January by heavy volume and technical glitches. Labor officials in several other states are reporting higher-than-normal use.

And even some of the systems that are holding up under the strain are leaving filers on the line for hours before asking them to leave a message.
Still others are giving them the ultimate slap in the face: “We’re sorry, all circuits are busy.”

“Regardless of when you call, be prepared to wait and just hang on. Try not to get frustrated,” Howard Cosgrove, a spokesman for the Wisconsin Department of Workforce Development, told The AP.

To stabilize a phone system that has been overloaded for weeks, his agency boosted its staffing of telephone operators by 25% last month.
“We sympathize, we’re on their side, we’re doing our best to help them out,” he said.

Job Losses Gets Personal for Truckers

Depending on your geographic location, you might not notice when an automobile plant closes – but truckers do.

Any business closing – and the resulting layoffs – represents another loss of steady work for truckers, who are responsible for the movement of about 0% of the nation’s freight, including food and hard goods.

As many as 785 trucking companies with a combined fleet of 39,000 trucks went out of business in the third quarter of last year.  Overall, more than 127,000 trucks, or 6.5% of the industry were idled in 2008, Donald Broughton, trucking analyst and managing director of Avondale Partners, told The Los Angeles Times.

That means tens of thousands of drivers previously on company payrolls are now competing with the nation’s independent owner-operators for a piece of a fast-shrinking cargo pie.

Joe Rini, from Grand River, Ohio, recently bid $3,400 to haul a load of building materials to the Pacific Northwest for one of his best customers.  Usually, the load would pay $4,400, but with possible competitors in mind, Rini lowered his bid and got the contract.

Still, before he could pick it up, another trucker low-balled him with a bid of $3,000.  Rini declined to match.

“I didn’t want to bid that low in the first place,” he told The Times. “I start down that road and I’m out of business.”

Elsewhere, fleet operators who so far have managed to survive are putting increasing pressure on their sales force to maintain revenues.

Despite being in the hauling business since the 1860s, Ventura Transfer Co. of Long Beach, Calif. is feeling the squeeze.

“Gone are the days where you can own a trucking fleet and just rely on the demand of the marketplace,” said Brian Olsen, Ventura Transfer’s chief executive officer.

California Dreamin’ No More

Even though he’s had no trouble so far staying gainfully employed in California, Mike Reilly, a 38-year-old engineering contractor, is leaving his home state’s lemon groves and beaches for the foothills of Denver.

California has often been called the “promised land” since the days of the Gold Rush.  But in 2008, many families gave up their California dream and headed elsewhere.

With an unemployment rate of 8.4% in November, and a record 236,000 foreclosures on the books in 2008, the Golden State has lost some of its allure.

Barry Hartz lived in California for 60 years before moving close to his son’s family in Colorado Springs.  Despite recent price declines from a glut of foreclosures hitting the market, he laments the escalation of home prices in the early 2000’s, “to the point our kids…could not live in the community where they grew up.”

The number of people leaving California outnumbered those moving in by a net total of 144,000 in the first six months of 2008 – more than any other state, the Associated Press reported.  For the first time ever the state could lose a congressional seat.

With the state facing a $42 billion budget deficit, further tax increases and education cuts were the last straw for Reilly, the engineer.

“You see wages go down and the cost of living go up,” he said.  Years of rising taxes, unchecked illegal immigration and bumper-to-bumper traffic have convinced him to move on.

What’s Next …

Overall, 48% of all companies downsized in 2008, and a staggering 60% are planning reductions in 2009, according to a Society of Human Resource Management survey.
Economists predict a net total of 1.5 million to 2 million or more jobs will vanish in 2009, and the “official” unemployment rate could hit 9% or 10%, underscoring the challenges that new U.S. President Barack Obama will face and the tough road ahead for job seekers.

Obama has called the jobs losses “a stark reminder of how urgently action is needed” to revive the nation’s staggering economy. His administration is planning a stimulus package costing upwards of $800 billion, consisting of tax cuts and other ways to try to help individuals and businesses.

But unemployment is feeding into a vicious cycle that Washington policymakers are finding difficult to break.  The jobless are now forcing almost all U.S. consumers – employed or not – to retrench for an uncertain future.

Source: U.S. Unemployment May be a Bigger Problem Than Government Statistics Say

1. That the recession is short and shallow, and something resembling healthy growth will resume beginning in the second half of this year.

2.That company earnings will once again enter double-digit territory in the second half of this year.

If you want to get sucker-punched by these false good tidings, then all you have to do is fall for the improvement of a company’s forward P/E compared to its TTM (trailing twelve months) P/E ratio. For example, if a company shows a TTM P/E of 15 going to a forward P/E of 12), you’d be investing on the premise that the company’s earnings in the next year will go up over 25 percent. You have to ask yourself, what are the chances of that actually happening?

PEG ratios have also been sucked into Wall Street’s inflated numbers. The “G” or “Growth” part of the PEG ratio looks at growth for the next five years. That number is way higher than it should be, because (as I’ve been saying for months) this recession is neither shallow nor short.

Finally… in the face of housing starts, housing inventories, foreclosures, consumer sentiment, durable orders and a host of other indicators hitting lows not seen for either years or decades, Wall Street is beginning to catch on.

J.P. Morgan cut its second-half-growth forecast by one full percentage point to 1.25%. I have a feeling other brokerages will be following suit.

These reassessments are lagging badly behind the data. It’s almost as if by closing its eyes, Wall Street is trying to will the economy into turning around. But the real laggard is earnings expectations. They’re even trailing behind the broader economic predictions.

It’s setting up the market for a fall in the second half of the year. We all know that markets move up and down based on expectations. And when expectations aren’t met, share prices can go south quickly.

The market went up last week. That means there’s hope. And hope is the last thing the market needs. Hope floats expectations. But it does nothing to raise company performance. And that disconnect is going to kill the market as summer turns to fall.

  Nearly 5 million people are currently working part time for economic reasons. Either they can’t find full-time work or their 9-5 doesn’t pay the bills. The number has risen 10% since November.

You’ll notice sudden rises just like these have been a hallmark of the last two U.S. recessions:

The number of hours Americans are working is dropping, too.

At only 33.8 a week and declining, the typical American workweek also harkens back to prior recessions… and is startlingly similar to a Frenchman’s workweek.

Overtime hours in the U.S. have fallen by an even greater margin. By these charts, we’re not in a recession yet, but we’re on the edge… and headed there quickly.

  Wall Street isn’t helping matters much. Following dismal earnings and a new hefty write-down (below), Citi announced 9,000 heads will roll this morning — that’s in addition to the 4,000 Citi employees already given the boot this year.

Merrill Lynch followed their own bad news yesterday with the announcement they’ll be letting 10% of their work force go, another 4,000 souls.

After the tech bust, Merrill put the kibosh on 30% of its employees. So as trends go, we’re just scratching the surface…

  J.P. Morgan predicted yesterday that as many as 40,000 folks in the City in London will lose their jobs. That’s double their December forecast — and 5% of the entire London financial work force. For comparison, 7% of the London financial work force was laid off following the tech bust.

  Citi came clean with another $12.1 billion in write-downs. They announced a $5 billion first-quarter loss this morning, too.

The loss is larger than expected, but a higher-than-expected top-line earnings number has given traders reason to celebrate, apparently. Ticker C rocketed up over 8% in premarket trading. Our best guess: A known loss is better than the great abyss. And there are still plenty of folks willing to time the bottom in any one of these behemoth Wall Street banks.

  Au contraire, counters Dan Amoss. “I expect financials to keep trending down. Banks and brokers still have plenty of losses to report in 2008 and 2009, even if they can go to the Fed window and temporarily swap their illiquid, impaired mortgage-backed securities for Treasuries.”

Readers of Strategic Investment who’ve followed Dan through this tangled mess have done well owning the ProShares UltraShort Financials ETF:

Since October, the UltraShort ETF has gone as high as 100%. It sits just below 60% today.

“Many banks will still have to cut dividends and raise capital with new share issuances. Look at the incredible dilution that MBIA and Washington Mutual shareholders have suffered. Widening yields will benefit a few banks that were prudent. But for most banks, credit losses will far outweigh their profits from an improving yield curve.”

  The stock market was sluggish yesterday. Market makers weighed great earnings from IBM against “bad but not horrible” news from Merrill and eBay’s lousy quarterly results… and came out even. The Dow and S&P finished unchanged.

Today, on the other hand, looks like it’ll be another big winner for the major exchanges. “Investors” are ignoring Citi’s write-down… and hooting it up with Google, instead. GOOG is up almost 20% today. The Dow opened up over 1%.

  In the U.S. bond trading pits, we notice a curious event. The10-year note yield has scooted up to its biggest weekly gain in over four years.

Bond yields, we remind you, rise when bonds are sold. Traders are signaling they see a more attractive stock market around the bend. They’re also a tad less confident the Fed will cut rates this month.

  Perhaps in tandem with the bond move, the dollar eked out a small rebound overnight.

The “not so horrendous” earnings reports this week have given some traders the notion that the U.S. economy might not be all that bad.

The euro shed 2 cents versus the dollar this morning, to $1.57. The broader dollar index took back almost a whole point, to a still quite horrible score of 72.

But be warned. “The fundamentals haven’t changed,” says Chuck Butler, proud “survivor” of this morning’s Midwest earthquake. “The U.S. deficit is soaring higher and higher, requiring us to attract more and more foreign investment… the economy is in a recession… jobs are hard to find… house prices are still falling… and we’re still fighting a war! Two wars! Does this sound like the stuff that a stronger currency is made of?”

  As the dollar rallied this morning, gold and oil sold off.

The spot price for gold got shellacked overnight… opening down $25, to $920, this morning in New York. We’d like to congratulate Kevin Kerr for taking profits on his RTA gold calls yesterday. He didn’t like Wednesday’s sideways lull in trading… so took profits of 102%… in just 4 months.

Light sweet crude backed off a dollar, to $114, this morning.

 Gasoline bucked the trend and hopped up another 3 cents overnight, to $3.44. Diesel followed suit and made $4.16, a record, today.

  Grain traders could not have given a hoot about the dollar rebound. Rough rice in Chicago shot up 4% — a full $1 — to over $24 this morning. Save a drastic sell-off today, this will mark the fourth straight week of record high prices for rice.

This latest spike came after the Philippines was unable to fill its 1 million ton order on Wednesday.

  Corn, soybeans and wheat all remains at record highs this morning, as well. Still…

“I think these prices could all go much higher,” writes the Maniac Trader from the first stop on his Midwest Farm Tour. “All of these nations experiencing food riots and social unrest… there is plenty of food on the shelves, but the price has gone up so much that no one can afford it. There is serious pent-up demand for grains, and any kind of major output disruption this year could drive prices higher.

“All the farmers I have spoken to so far say that come hell or high water, they will plant corn. Unfortunately, we seem to have both. Almost like betting all your chips on red and hoping that the roulette wheel is favorable. Problem is we are gambling with the world’s food supply.”

Kevin made similar comments on Kudlow & Company… check him out here.

  “The medical situation in this country is dire,” responds our Byron King to yesterday’s 5. “We are seeing rising demand for medical services in an environment of rising costs. This is not sustainable over the long haul. That is all true.

“But we also have immediately looming energy and resource problems to add to the medical situation. Medical care in the U.S. is highly hydrocarbon and energy intensive. Think about the electricity requirements of hospitals — a large one uses as much electric power as a steel mill. Or consider the vast array of plastic goods that get stuck into your veins and taped to your skin — many of these items come from overseas plants, courtesy of ‘globalization.’

“If the U.S. does not get its energy act together, the medical problem will compound greatly. Instead of 47 million uninsured, we may see 147 million uninsured as employers drop health coverage in an environment of rising energy costs. And the care structure that remains will be trapped between local brownouts and widespread shortages of critical materials, available only at extreme price levels.

“Come to think of it, we had better collectively lose more weight and get our butts down to the gym to sweat the cholesterol out.”

  “In 2001, my family and I were living in Kobe, Japan,” writes another reader. “My 2-year-old son fell, took a blow to the head and had some slight bleeding from one ear. We rushed him the emergency room. The Japanese doctors gave him three X-rays, an MRI, a CAT scan and a sedative to calm him down because he wouldn’t sit still for the MRI. Total bill before insurance was $235. My son was and is OK, although his older brother insists that there is something wrong with him.”

The 5 responds: The total bill presented to you was $235? Who paid for that MRI machine? Who paid the researchers and engineers all those years the machine was being developed?

  “Prior to practicing in the civilian sector,” writes a third, “I was in the military and traveled quite a bit abroad. Prior to getting into medical school, I did some work overseas in Europe, as well, causing me to rely on the health care system there.

“If the reader who was seen in Scotland got a good outcome and liked the services there, I am glad things worked out in that situation. That has not been the case for many others, and I am speaking not just of the Americans treated abroad, but of the citizens of those countries I have been in.

“Overall, the U.K. has very well-trained doctors and nurses, yet the system is not what most of us would find acceptable. I would venture to make a very safe guess that most Americans would be shocked to be the recipient of care in many European countries. France, Germany and the Swiss seem to offer pretty optimal care. As for the rest, well, I wouldn’t choose care like that for my family.”

  “I had lunch with a doctor the other day,” writes another. “While we were discussing what a disaster nationalized health care would be in the U.S., he suggested we should ignore comparisons to other countries with nationalized health care. If you want to know what health care will look like if run by the U.S. government, said he, just look at the V.A. system…”

The 5 responds: Amen.

Enjoy your weekend,

Addison Wiggin
The 5 Min. Forecast

“Given the exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain.”

-Fed Chairman Ben Bernanke

“Was this a justified rescue to prevent a systemic collapse of financial markets or a $30 billion taxpayer bailout for a Wall Street firm while people on Main Street struggle to pay their mortgages?”

- Senate Banking Committee Chairman Christopher Dodd

From where I sit, far away from Washington, it seems like the bailout was both. Yes Mr. Bernanke is correct, had Bear Stearns gone under, there would have been massive panic in the world’s financial markets, not just the U.S. market.

Is it a bailout at the taxpayers’ expense? You bet it is. There is no way J.P. Morgan agrees to this deal without the Fed taking on the risk. Well, after the uproar of JPM paying just $2 per share for BSC and not taking on any of the $30 billion in bad assets, the deal had to be revised to $10 per share and now JPM is taking on the first billion of the risk with the Fed taking on the other $29 billion. Jamie Dimon, the CEO of J.P. Morgan, said in his prepared remarks that JPM would not have done the deal if the Fed had not agreed to take on the risk.

This sounds like a low down payment mortgage. I buy a house and put three percent down, the bank puts up the other 97 percent. If I go into default on the mortgage, I lose the three percent I put down and the bank is left with the rest of the risk. If it goes to auction, they might make money on it, but not necessarily.

The Fed believes that it will eventually make money on these assets, but as you and I both know, there is no certainty in investing.

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I was just on a radio interview with WMMB, the CBS radio affiliate in Chicago. They asked me what I thought of the Fed’s involvement with the JPM/BSC deal. My answer was that “I’m glad I didn’t have to make that decision.” Think about it, if you are Bernanke and don’t do anything, the world’s financial system goes into an all out panic. Or you can stick the U.S. taxpayer with a potential $29 billion bailout.

I still think JPM got a steal, even after so generously agreeing to take on the responsibility of one billion in losses should they occur.

I still can’t say whether or not the Fed should have done this deal. It might take several years to tell whether or not it was the right decision. For now, it was the right decision in that it kept stability in the U.S. and world financial systems. But if the assets they agreed to take on as part of the deal end up costing the taxpayer $29 billion down the road, then it was a bad decision.

The part that worries me is now that there is a precedent for the Fed to step in like this, when will the next time be? I read some comments from Todd Harrison, the founder of Minyanville.com, and I like how he put it. Mr. Harrison said it was like the situation in Iraq in that the Fed is engaged and can’t pull out now without some serious consequences.

I could not agree more. I know my colleague Rusty McDougal is usually the one railing on the government for getting involved in the market, and I usually agree with him, I just don’t usually express it here in the pages of IDE. But the words Laissez Faire mean nothing anymore. There is no such thing as a free market anymore.

I will wait to pass judgment on this particular Fed decision. Whether or not it was a good business decision is one thing and that will take time to figure out. But interfering with a supposed free market system is a no-no in my book.

Good luck and good trading,

Rick

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

[Ed. Note: Subscribers to Rick’s KISS Investing service recently closed out gains of approximately 150% on Continental Airlines and 175% on the Diamonds Trust. Click here to learn more about KISS Investing]

Then a second news alert hit my inbox. The Fed had just lowered the discount rate from 3.5 percent to 3.25 percent. Was the Fed trying to calm the market? You bet they were. When news of BSC being sold at such a discount hit the street, futures dropped as much as 38 points. After the Fed announcement, they were down only 22 points.

You never know when the market will make an unexpected major move, up or down. That’s why I recommend being somewhat balanced between bullish and bearish positions. It is also the reason why you should take profits off the table on portions of your trades. If you take, say, a 50 percent profit on a third of your position, you will have limited your potential loss without limiting your gain if the stock continues to rise.

Though it was Sunday night and the equity markets were closed, the news was coming fast and furious and money was being made and lost. Bear Stearns dropped from $30 to $3.18 in one move. There was nothing traders could do unless they were trading futures, because S&P futures markets open at 5:30 p.m. Eastern Time on Sundays. Equity traders and options traders had to wait until Monday’s opening bell to know their fate. But those who had balance in their portfolios and had been managing their trades with partial closeouts didn’t have much to worry about.

Remember the phone call that Gordon Gekko makes to Bud Fox in the movie Wall Street that starts out with “Money never sleeps, Buddy Boy.” No kidding.

[Ed. Note: Rick Pendergraft is a professional trader and market analyst. In Rick’s new investment service, he reveals how you can make hundreds - even thousands - of dollars just by playing a simple game of "guess the pattern." Learn more here.]