This past week produced economic data that looked bad to say the least.  Job losses are the highest since hurricane Katrina and the amount of people seeking benefits is actually higher than the months after the catastrophe.  Job losses are both a lagging and a future economic indicator as they judge how corporations are cutting back and also shows that the production of wealth is also limited.

Wealth can only be generated by producing more than you need.  In this case, lets take a lemonade stand as an example.  Sally has a lemonade stand, to do business she need her factors of production, lemons, water and sugar (promotion not included).  She buys $5 worth of lemons water and sugar which will produce 5 gallons of lemonade that she can sell for $3 per gallon.

Sally’s investment is a mere $5 but she is able to produce $15 worth of lemonade.  In this example she can sell her $15 in lemonade and produce a $10 profit, which is wealth.  She provides a good or service that people want (lemonade) for a higher price than it costs her to make.  Customers are happy because they have their lemonade and she is happy because she has produced a profit.

The job market slowdown shows either an increase in productivity, unlikely, or a decrease in overall business activity.  Workers are needed to produce goods and profit for a company, so when they are laid off, it appears that business activity and wealth creation are temporarily slowed.

A corporation could lay off workers for a variety of reasons, but it is usually to cut costs and limit the amount of one good they can produce.  Corporations would much rather have a smaller workforce work at 100% capacity than a much larger force work at 70% capacity.  The difference between 70% and 100% is waste to a company.

When the job market slumps it is indicative that the “wealth creators” are also taking a slump.  If this is the case, the overall size of an economy is shrinking because it is no longer producing as much as it once was.  In this case, 80,000 jobs were lost indicating that the economy will shrink as it produces less.

No wonder why job losses have Wall Street in an uproar.  A cut of 80,000 jobs means less is being produced.  The economy is by all definitions shrinking, or showing the effects of a recession.