Slow Job Growth Puts Recovery at Risk

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    NEWSLETTERS

    Bob Hansen
    The Goodwill thrift store also includes an employment center, which helps people write resumes and apply for jobs.

    The U.S. economy will have to do better than this.

    After a surge of new jobs coincided with a massive flow of federal spending, the pace of job creation has fallen back to levels that isn’t even keeping up with population growth.

    With government stimulus spending fading, public and private payrolls lost 131,000 jobs in July, according to the Labor Department. Private employers added 71,000 jobs last month, fewer than forecasters had expected.

    “The good news here is we are not falling off a cliff; were getting job growth,” Mark Zandi, chief economist at Moody’s Analytics, told CNBC. “But obviously this is not enough. If we don’t see better job growth this year and next the recovery is in jeopardy.”

    Unless the economy’s slow, steady pace picks up, some 15 million Americans sidelined by the recession will remain without a steady paycheck. Without those paychecks to boost consumer spending, the already weak recovery will be difficult to sustain.

    The unemployment rate held steady at 9.5 percent in July, down from its recession peak of 10.1 percent. But that number may not fully reflect the portion of the population who want a job.

    "We've seen the unemployment rate drift down because people dropped out of the labor force in recent months rather than join it," said Diane Swonk, chief economist at Mesirow Financial. "That's the opposite of what you'd be seeing a year into the recovery when people you hope are rejoining the labor force because the job prospects are getting better."

    Manufacturing
    Manufacturing continued to offer signs of hope for job growth in July , especially among hard hit auto makers, who emerged from a wrenching restructuring smaller, but in better financial shape.

    Pent-up demand from owners with older cars and a gradual improvement in the availability of credit has also revived car sales, according to Mike Jackson, CEO of AutoNation, one of the nation's largest chains of car dealers. But the industry is still operating well below the boom years earlier in the decade.

    "We're simply rising to an annual selling rate of 11.5 million, which is still a depression-level number overall," he said. "So to really see the industry get back to recessionary levels and normal levels, we need jobs and we need healing in housing."

    After a spurt of home sales this spring as buyers rushed to take advantage of the second round of federal tax credits, the housing market slumped again after the program expired in April. The pace of new home construction has fallen close to the lowest levels on record. After more than two years of public and private efforts to halt foreclosures, millions of Americans are still struggling to pay their mortgages.

    "That’s one reason the housing market is still very weak and we’ll probably see more house price declines," said Zandi. "It’s another reason to be nervous on the economic recovery in the next six ,12 months. We're not home free yet."

    Friday's jobs data confirmed a series of economic reports showing that, after a surge in late 2009 and early this year, the economy is slowing. Gross Domestic Product fell to 2.4 percent in the second quarter from 3.7 percent in the first three months of the year. Retail sales remain weak, and the pace of weekly jobless claims remains high. In surveys, consumers report they have grown increasingly wary of general economic conditions and their own personal finances.

    That's not what should be happening at this point in a sustained economic recovery. Since World War II, U.S. recessions have been followed within a year by annual growth rates of about six percent, according to David Rosenberg Chief Economist at Gluskin-Sheff. That's more than twice the current pace of growth more than a year and a half after the recession began in December 2007.

    Thirty months into typical post-War recovery, GDP would be eight percent higher than pre-recession levels and payrolls would be up 721,000, according to Rosenberg. Thirty months into this recovery, there are 7.8 million fewer jobs, and GDP is one percent lower.

    The government's unprecedented infusion of cash into the economy was supposed to revive demand in the private sector. But, so far, that momentum hasn't picked up. Rosenberg notes that real final sales — a broad measure of demand from both consumers and businesses — is running about 1.2 percent, well below the four percent levels seen after a "normal" recession ends.

    "The fact that it is averaging at around one-third the typical pace in the face of unprecedented policy stimulus is rather telling; and frightening," he wrote in a note to clients this week.

    The fear is that the massive $825 billion spending program provided only a short reprieve from the recession — and that the economy could headed for another contraction. Most economic forecasters say the odds of a so-called "double-dip" are less than 50-50. But those odds, along with the number of forecasters paring back their growth estimates, have risen since the economy's strong showing this spring.

    Government's response
    The mounting evidence of a slowdown has revived debate about the nature and scope of the government's response. Congress, facing an electorate frustrated and worried about rising budget deficits and federal debt, have been reluctant to enact additional stimulus spending. A relatively small bill to continue jobless benefits for sidelined workers, for example, became mired in months of debate.

    The Senate this week passed a $26 billion package of aid to cash-strapped states. But that won't fill the estimated $100 billion budget hole, making further cuts in government jobs all but certain.

    The government's second main weapon, the Federal Reserve's monetary policy, is also the subject of heated debate within the central bank. The Fed's Open Market Committee, which meets next week, will consider whether to resume buying government bonds to free up cash and drive long-term interest rates lower. The central issue: whether to act now to try to head off a further slowdown or wait until the economic data presents a clearer picture of the growth outlook.

    "I think one of the fears they have is that if things were to turn down, and we look back and they did nothing, they want to at least look like they tried," said Swonk. "And I think that's one of the issues that are tugging on them right now."

    Fed policy makers have an even thornier problem on their hands: the risk that continued weak demand pulls the economy into a period of sustained, falling prices — or deflation. Though not seen in the U.S. since the Great Depression, deflation has ravaged the Japanese economy for more than a decade, despite numerous efforts by policymakers there to reverse the trend.

    Last week, St. Louis Federal Reserve president James Bullard warned that, though he thinks such an outcome unlikely, he believes Fed officials need to put measures in place now to prevent deflation from taking hold.