08/03/2012 01:08 pm ET Updated Oct 03, 2012

A Better Job Report But Challenges Remain

When it comes to economic data, I have been dreading the employment report issued on the first Friday of every month. And I am not the only one.

For the last few years, this release from the Department of Labor has signaled insufficient job creation. It has also pointed to an increasingly segmented labor market, where the highly educated and affluent do well while vulnerable segments of society see little improvement. In the process, the unemployment crisis has gotten more embedded into the structure of the American economy.

So it was a major relief this morning that the July report was a lot better than prior ones.

At 163,000, job creation came in ahead of consensus expectations of 100,000. Long-term joblessness fell from 5.4 million to 5.2 million. The employment gains were broad based in terms of sectors. And average weekly earnings rose slightly.

This is all good news... and especially after way too many months of disappointments. Yet, and unfortunately, it is too early to relax.

The report still contains flashing yellow lights; and the future is still too uncertain with respect to both domestic and international conditions.

In July, the unemployment rate edged up slightly to 8.3% despite more Americans falling out of the labor force. In fact, the participation rate declined from 64.0% to 63.7%; and the employment-population ratio, which is the most comprehensive measure out there, slipped from 58.6% to 58.4%.

Then there are the compositional issues. There was little relief for those who need it most, including too many Americans who risk slipping from being unemployed to being unemployable.

For example, teenage unemployment rose from 23.7% to 23.8% while joblessness among those with less than a high school diploma increased from 12.6% to 12.7% (compared to a stable 4.1% for those with bachelor degrees and higher).

Put these numbers together and what you get is a picture of an economy that is healing, but doing so gradually and unevenly.

So much for the past and present; how about the future?

Left to its own devices, the economy would continue to heal and, concurrently, job creation would accelerate. But will they?

For the improvement in the labor market to continue and broaden, America needs to minimize the risk of derailment by three clear and present dangers: the reluctance of Congress to deal with the fiscal cliff, Europe's inability to get ahead of its crisis, and a possible geo-political shock emanating from Iran.

In such circumstances, it would be reasonable to expect Congress to be giving the unemployment crisis the attention it needs and deserves. Our elected representatives should be working hard on ways to accelerate the economic healing and also minimize vulnerability to these potential shocks.

Unfortunately they are too polarized to do so; and it looks like they won't until the November elections are behind them, at the earliest.

So despite the latest monthly improvement, America's unemployment situation will remain a challenge. And many of us will continue to nervously await the monthly data releases.