After almost four straight months of rallying, Wall Street returned from the Independence Day vacation in a somewhat gloomier mood and the leading indexes took a few steps back. Weeks of optimistic reports about prospects for near-recovery had led more and more "experts" to declare that "we've already hit bottom." But then came the disappointing June jobs report and the screens were painted in red again. The 467,000 Americans who lost their jobs last month brought the total number of layoffs since the crisis started to more than 6.5 million. The frightening unemployment rate now officially stands at 9.5 percent of the total labor force, but this figure hides an even more terrible truth. A broader unemployment rate called U-6, which includes people who have stopped looking for work or can't find full-time jobs, hit a record of 16.5% in June. That's more than 25 million people, a staggering number even for those who actually believe the official statistics provided by the US government. (I am definitely not one of them.) It is true that since the month of January, when the labor market shed more 700,000 jobs, the pace of this massive job destruction has declined. But still, even in a "good" month like March, the US economy lost 320,000 jobs. Not to mention the fact that the American economy needs to generate 100,000 new jobs each month just to keep pace with the natural growth of the population. The sad news is that the trend is not about to reverse; the chances are it is about to worsen. The private sector, which accounts for the vast majority of jobs, is only in the middle of the long, painful process of adjusting itself to the new reality. Businesses all over the US are still trying to get rid of stockpiles accumulated in the fat years of 2003-2006, whether new homes in Vegas, piles of pick up trucks in Detroit or apparel in the malls. Households and firms are still fighting their huge debt burden, while more and more fall victim to foreclosure and bankruptcy. Even if the US economy starts to recover in the near future, it will still take time for businesses to regain confidence and recruit more workers. On the other hand, if the recovery doesn't come soon, as is indicated by June's labor report, the turn around in the labor market will be even further down the line. Many hope that the massive government bailout plan will save the day and believe that it is Washington which should offset the private jobs destruction by hiring more people to work in the public sector. This is a problematic assumption. Most of the jobs in the US public sector are local: state, county or city. But the states are in perhaps their worst financial position ever. Most of them suffer from huge deficits, sharply falling revenues due to a decrease in economic activity and dried-up traditional credit markets. California is a prime example. With a population of 37 million, this state accounts for about 14% of America's GDP. The deep crisis in the state's real estate market, combined with a sharp fall in its income tax revenues, has brought California to a deficit of $40 billion. Governor Schwarzenegger had no choice but to halt all public projects, lay off thousands of workers and teachers, and force others to take unpaid leave. This sad situation is true for many other states, including Florida, Michigan, Georgia and Nevada. So expecting salvation from the public sector is highly unrealistic. It is more likely that the federal government's next major bailout injection will be directly to defaulting states, but as was the case in the financial sector, the hundreds of billions will be used just to keep the states solvent, not to increase their expenditures and their labor force. The realization that the economy is in far worse shape than previously assumed is finally starting to come to the attention of the US leadership. Vice President Joseph Biden admitted last week that President Barack Obama's administration had "misread the economy" and didn't fully understand how deep the crisis was even as late as January. Paul Krugman, the leftist Nobel Prize winner and one of Obama's strongest supporters, has called for another immediate massive bailout plan, on top of the $800-billion scheme that was approved only four months ago. These statements clearly contradict the official White House and Fed stance that the crisis is now closer to its end and that America should now focus on restraining its huge deficit. It is not important whether Krugman's idea about additional money printing is wrong or not, his pessimistic read of the current state of the economy is probably right. One of the differences people like to point out when comparing this crisis to the Great Depression is that we are no where near the 25% rate of unemployment that was recorded back then. Maybe that is true for 2008-2009, but what we learnt from June's jobs report is that even if the pace of layoffs slows down in the coming months, we are still getting very close to the frightening numbers seen in the 1930s.