A slight drop in the unemployment rate in July offers some hope that the economy may be battling out of recession.
It's a small, tentative step. But a step in the right direction.
After three years of job losses that sidelined some 8.4 million workers, Friday's government report showed the U.S. economy added 162,000 jobs in March — the best performance since the worst recession in decades sent the unemployment rate soaring.
Despite the gains, the unemployment rate remained unchanged at 9.7 percent — as some 400,000 so-called "discouraged" workers dusted off their resumes and revived their job search.
Economists warn that, as encouraging news draws more of those workers back into the job market, the jobless rate will remain stubbornly high — and could even tick up.
Also, the continued rise in the so-called "long-term" unemployed, or those who have been out of work for six months or more, could still hamper the economic recovery. When so-called "discouraged workers" are counted, the unemployment rate in March rose to 16.9 percent.
"One of the problems going on is people that would like to have full-time work are being shunted into part-time work, and that means that wages still aren't recovering all that much," said David Malpass, an economist at Encima Global, a research firm. "So I agree it's an improvement. It's just not good enough."
A factor muddling the overall labor picture was that the jobs number was bolstered by a surge in hiring by the Census Department, which is ramping up its decennial count of American households. Roughly 50,000 of the new job in March were census jobs. That number is expected to increase in coming months, potentially overstating the strength of the job market because those jobs are only temporary.
"We'll get even bigger numbers [of census jobs] in the next couple of months," said Mark Zandi, chief economist at Moody's Economy.com. "I don't think we can get a good read on unemployment or the job market until we get in the summer months."
Manufacturing boosts recovery, but headwinds seen
Still, the report offered hopeful signs that March's job gains may be sustainable. Manufacturers added 17,000 jobs — the third straight monthly gain.
That data mirrors a separate report Thursday from a closely-watched monthly report from a purchasing executives trade group, the Institute for Supply Management, which found the U.S. manufacturing sector in March grew at its strongest pace in 5 1/2 years.
After cutting inventories to the bone during the recession, companies have begun restocking warehouses and store shelves as they see early signs demand is picking up again. New orders for goods also picked up in March. That could bode well for future expansion of production.
"Clearly all the trends are in the right direction," said Robert Barbera Chief Economist at ITG, Investment Technology Group. "I think with the benefit of hindsight a year from now, we'll find out that the jobs numbers were better (than we thought). Retailers are saying the spending numbers are strong. This is a real, sustainable expansion."
The upturn in hiring follows back-to-back quarters of sizzling growth in U.S. Gross Domestic Product, after a multi-trillion-dollar economic stimulus from both the Congress and the Federal Reserve helped jump start an economy on life support. As that stimulus fades later this year, the hope is that the rest of the wheels of the economy begin turning on their own.
But some economists caution that serious headwinds could slow that process.
One is the huge number of people without a paycheck, many of whom have been out of work for so long they are exhausting their unemployment benefits. That's weighing on consumer spending, which still accounts for roughly two-thirds of U.S. economic activity.
Congress has extended benefits three times and will likely have to do so again. The added benefits are also putting a big strain on states — whose budgets are already hurting — because state unemployment insurance funds have been severely drained by this recession.
Tight credit is also dampening growth for many small businesses, a critically important sector that creates the bulk of new jobs. Small- and mid-size banks that typically lend to small businesses are still working through a big pile of bad loans. That's made bankers a lots choosier about who they'll lend too.
Labor sector recovery uneven
The improvement in the job market, like the underlying economic recovery, is playing out unevenly. Unemployment remains highest in those parts of the country hit hardest by the housing bust, along with Midwest states that rely heavily on manufacturing.
The jobless rate for adult men was 10 percent in March, two points higher than for women. The rate for African-American workers was nearly twice as high as that for whites; older workers are generally faring better than younger workers.
The March data echoed reports from recruiters and staffing companies that they began to see job demand perk up at the beginning of the year. Job growth typically lags in an economic recovery as businesses slowly gain confidence that the upturn will sustain itself.
Until that confidence returns, many employers have been meeting increased demand for their products and services by adding overtime - or just asking existing employees to work harder. That's a big reason productivity numbers shot been through the roof for the last two quarters. But eventually, worn out workers need help in the form of new co-workers.
"Productivity increases have been really dramatic," said Matt Ferguson, CEO of the online job site Career Builder. "And those probably can't continue at those levels for long term. As you get into the fall, there will be a realization that companies have to add back to hit whatever revenue projections are making as they go into 2011."
But even as the pace of hiring picks up, it may take years to see a return to employment levels before the worst recession since the 1930s. Even if 200,000 to 300,000 new jobs are created every month, it will be years before the heavy job losses of the past three years are reversed.
In the meantime, the economy will continue to struggle as homeowners recover from high debt levels and big losses in the value of their homes.
"The labor market continues to improve but the improvement is moderate and unfortunately too slow to cure the consumer credit (and) housing foreclosure issues very quickly," said John Silvia, the chief economist at Wells Fargo. "Curing a hangover takes more time than it took to get drunk."