By Don Miller
Could the U.S. economy be looking at a "jobless recovery?"
After the worst financial crisis since the Great Depression reached its apex late last year, the U.S. economy has shown signs of life in recent months. Stock prices have soared. The housing market – once in veritable freefall – seems to be bottoming out in preparation for an eventual upsurge. And just last week, the government said that businesses cut jobs in May at the lowest rate in six months, a report that offered encouragement both to investors and to the millions of U.S. workers who have lost their jobs.
But U.S. Federal Reserve Bank Chairman Ben S. Bernanke threw cold water on hope for a full-blown economic rebound when he hinted that the U.S. labor market could well be facing a jobless recovery – an upturn in which the economy and corporate profits advance, but virtually no new jobs are created to compensate for years of layoffs.
Just this week, economists at the Federal Reserve Bank of San Francisco said they see signs that the current turnaround could mimic the aftermath of the 1990-1991 recession – a wheezy, drawn-out recovery with little hiring that means years of additional problems for U.S. workers.
"This projection indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate," the Fed economists wrote. "This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing work forces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates."
Unemployment Damage Widespread
Alongside other economic indications of a stabilizing housing market and rising consumer confidence, the unemployment figures offered a glimmer of hope that we may be on the cusp of an economic turnaround and the end of job destruction.
But it's highly unlikely this economy will produce meaningful job creation anytime soon. The financial fallout from the biggest recession in 60 years is likely to be so costly and so pervasive that new-job creation is likely to be virtually nonexistent for years to come, particularly in the manufacturing and construction industries.
The U.S. Labor Department reported that the economy lost "only" 345,000 jobs last month, significantly lower than the 520,000 that analysts expected and the first time since October that job losses didn't increase.
But even though the latest report may be an improvement, the fact is that companies slashed jobs during the latest recession at a rate that's been rivaled only a couple of times since the Great Depression. Indeed, the Labor Department said that:
- The U.S. economy has lost more than 6 million jobs since the recession began in December 2007 – meaning nearly one out of every 20 jobs was eradicated.
- The unemployment rate now stands at 9.4%, the highest since 1983.
- A total of 14.5 million Americans are now unemployed. The number of long-term unemployed (those without jobs for 27 weeks or more) increased by 268,000 to 3.9 million and has tripled since the start of the recession.
But even those statistics – as grim as they seem – don't tell the whole story.
As reported previously in Money Morning, the "official" employment rate doesn't account for workers that have been switched from full-time to part-time jobs. And it also doesn't include "marginally attached" workers – people who have given up job-hunting altogether.
If you added those unfortunates to the government's jobless tally of 9.4%, the "real" unemployment rate would stand at a staggering 16.4%.
That's the worst showing since the 1981-1982 recession when the official jobless rate peaked at 10.8%, which was the worst to hit the labor market since the Great Depression. A total of 2.8 million jobs disappeared in that downturn, but the labor market was much smaller back then.
Unfortunately, the nature of this recession makes it likely things will get worse before they get better.
As two of the so-called "Big Three" U.S. automakers – General Motors Corp. (OTC: GMGMQ) and Chrysler LLC – attempt to navigate their way through the Chapter 11 bankruptcy process, they are set to close more than a dozen manufacturing plants and to cut another 32,000 jobs. Any moves that GM and Chrysler make will likely also have to pass muster with the Obama administration, which made loans to both of those carmakers.
Other major U.S. employers are likely to follow suit as they continue to reduce inventories and cut back on capital investment. That leaves most economists predicting that even the official jobless rate will top 10% by year-end.
An Economic Recovery May Not Bring New Hiring
So what happens to the labor market when the layoffs end and the economy starts to grow again?
All indications are that the road to recovering the millions of job lost during this recession will be a bumpy one.
Employers remain skittish as they slowly recover from the biggest economic upheaval since World War II and are already saying they will be cautious about replenishing payrolls anytime soon. And just the sheer numbers of people on the street dictates that it will take some time to bring even a portion of them back into the work force.
But to get to the heart the matter – the one factor that will keep the job market moribund for some time – analysts point to the bubble-bursting events that let the air out of the gigantic auto and housing sectors, the economic engines that drive manufacturing.
"It will take a recovery in automobiles and housing for the manufacturing sector to once again prosper," Norbert J. Ore, chairman of the Institute for Supply Management Manufacturing Business Survey Committee, told The Kiplinger Letter, noting those sectors have shed more than 1.5 million jobs in the past two years.
And despite the government's monumental stimulus program to create 3 million jobs in the next two years, those critical sectors are likely to face moribund prospects until at least 2010 – and perhaps even longer.
"It's going to take five or six years for homebuilders and automakers to fully recover from this recession, and it may take longer," says Martin Hutchinson, a Money Morning contributing editor who has written extensively about the current downturn. "You're not going to see aggressive hiring in those industries for a good while."
Hutchinson says the automobile business is in particular difficulty from outsourcing.
"A great deal of the cutting-edge technology associated with the U.S, automobile business is currently being outsourced to other countries, which will further hinder product development and sales for that sector and constrain future hiring," Hutchinson said.
Federal Chairman Bernanke also says that the labor markets may continue to suffer for some time.
In a speech to Congress on May 9, Bernanke pointed to lack of consumer spending and weakening demand for commercial and industrial loans as constraints on future hiring.
"Even after a recovery gets under way … we expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly," Bernanke told U.S. lawmakers. "In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes."
2001 Recession – Déjà vu All Over Again
This won't be the first jobless recovery the U.S. economy has experienced.
In the 2001 recession, 1.6 million jobs were slashed. Unfortunately, the end of that downturn didn't bring an end to the job cuts: In the year that followed the recession's conclusion, another 562,000 workers lost their jobs. And in the 12 months that came after that, 193,000 more workers lost their jobs.
It wasn't until 2004 that more than 2 million new jobs were finally created.
In fact, the only job growth we're seeing now is in healthcare and education where a paltry 44,000 jobs were added in May. Meanwhile, more than 9.5 million jobless workers took temporary employment last month, a category that's seen its ranks grow by 5.8 million since the recession started, the U.S. government reported.
But it's the jobless recovery of the early 1990s – which followed the recession of 1990-1991 – that may offer the best insight into what we can expect to happen next, the Federal Reserve Bank of San Francisco economists say. That admittedly pessimistic view is based on two factors:
- First, of all the jobs that have been slashed, a miniscule number are classic "layoffs," where workers are actually expecting to be called back to their jobs when economic conditions improve. From July 1981 to November 1982, the share of unemployed workers on temporary layoff rose from 16.1% to 20.7%. From December 2007 to April 2009, however, the share of unemployed workers on temporary layoffs decreased from 12.8% to 11.9%.
- And second, the number of people who are involuntarily working in part-time positions (when they want full-time jobs) is at a historical high. In December 2007, about 3% of the work force had taken part-time jobs for economic reasons. By April of this year, that number had nearly doubled, reaching 5.8%. What's more, more than half of those workers had reported that their weekly hours had been cut by at least five hours.
Uncle Sam to The Rescue?
It's not all gloom-and-doom on the hiring front, however.
The government's $787 billion stimulus package is slowly working its way through the federal bureaucracy to local government coffers with promises to create or save more than 3 million jobs over the next two years.
And on Monday, President Barack Obama announced 10 projects aimed at speeding up stimulus spending to create or save more than 600,000 jobs, Bloomberg News reported.
Calling it a "summer of accelerated Recovery Act activity," President Obama said the effort includes new services at health centers in all 50 states; work in 107 national parks, airport improvements, and highway construction. They will also provide funding for schools to hire more teachers.
In the first three months of the Obama administration's stimulus plan, the government doled out about 11% of the stimulus funds, according to a progress report released by Vice President Joe Biden's office on May 13.
The report said that most programs and projects were running ahead of schedule and under budget and 70% of the funds will be allocated in the next fiscal year – enough to make a major impact, even though it's less than the 75% allocation promised by the White House.
Of course, there's a great deal of political debate over how effective the stimulus program will be.
U.S. Rep. John A. Boehner, R-Ohio, and the House Republican leader, said last week the stimulus "isn't producing jobs immediately, as the administration promised."
And Money Morning's Hutchinson says the net long-term effects of the stimulus program may be a wash for taxpayers and businesses anyway.
"U.S. businesses and consumers will be paying for all this anyway with higher taxes and interest rates," Hutchinson said. "Any job creation from that will be neutral for the economy."
News and Related Story Links:
- Money Morning:
U.S. Unemployment May be a Bigger Problem Than Government Statistics Say
- Kiplinger Forecast:
This Jobless Recovery Will Be Agonizing
- U.S. Congress Joint Economic Committee:
The economic outlook — Chairman Ben S. Bernanke
Obama Unveils New Projects to Speed Economic Recovery.
- Federal Reserve Bank of San Francisco:
Jobless Recovery Redux?
- Money Morning Special Report:
"Hyper-local" Stats Show Housing Market Has Bottomed.
- Money Morning News Analysis:
Mortgage Applications Slump but Housing Market Continues to Battle Back.
Another Jobless Recovery?
- Money Morning:
Unemployment Rate Hits 25-Year High, But Losses Narrow