Job Losses Slow but the U.S. Economy is Following the Script for a Jobless Recovery

The pace of U.S. job losses slowed in August, but the country will likely be saddled with a high unemployment rate throughout all of 2010, analysts say.

In short, even though the economy has improved, the odds of a "jobless recovery" continue to grow.

Employers shed 216,000 jobs in August, an improvement over the 276,000 positions eliminated in July. However, the unemployment rate still swelled to 9.7% - its highest level since June 1983. The total number of jobs lost since the recession officially began in December 2007 now stands at about 6.9 million.

The overall employment picture is even bleaker when part-time employees that would rather have a full-time job and discouraged workers who are no longer looking for a job, but who would take one if it were available. The unemployment rate actually rises to 16.8% when those individuals are taken into account.

It is believed that the total number of people unemployed in the United States is about 15 million, and that number is expected to climb substantially for the remainder of the year and well into 2010.

The Congressional Budget Office (CBO) says unemployment will peak at 10.4% next year before receding to an average of 9.1% in 2011.

"High unemployment rates are going to be with us for quite a while," Michael Feroli, an economist at JPMorgan Chase & Co. (NYSE: JPM), told The New York Times. "It's going to be a long, long time before we see 6% or 7% unemployment."

Worse yet, a record number of workers have been unemployed for six months or more, and many others are starting to use up their unemployment benefits, their extended benefits, and even emergency payments from the government.

More than 500,000 unemployed Americans will run out of their 20 weeks to 53 weeks of benefits by the end of September, according to the National Employment Law Project. A further 1.0 million people will see their benefits expire by the end of the year.

With such a dour outlook for the future, the possibility that the U.S. economy is headed for a jobless recovery - where companies make up for lost profits by keeping their headcounts low - is becoming a reality. And that's if the economy actually recovers at all.

"There's no such thing as a jobless recovery - we need jobs to have a recovery," Kevin Mahn, a managing director of Hennion & Walsh told SmartMoney. "Until we start seeing positive signs in consumer spending and in the jobs market, we won't see a sustainable recovery. If, in fact, we don't see the consumer coming back to the table, we're going to see degradation in corporate earnings in the third and fourth quarter."

Consumer spending accounts for 70% of the economy by some estimates, and so far the little consumer activity the economy has seen in recent months has been the direct result of government stimulus programs.

Retail purchases rose 0.2% in July, but that increase was largely the result of the government's Car Allowance Rebate System (CARS), popularly known as "Cash for Clunkers," which drove a 1.8% increase in durable goods spending. Sales of cars and light trucks rose to an annual pace of 11.2 million units in July - the most since September 2008.

Analysts anticipate a significant drop in sales now that the Cash for Clunkers program has run out of gas.

"The reality is that clunker cash is ultimately an unsustainable fuel source for consumer spending," Richard Moody, chief economist with Forward Capital, wrote in a note to clients. "Restrained growth in consumer spending beyond [the third quarter] is one factor behind our forecast that what will be fairly rapid real GDP growth for [the third quarter] will not be sustained over subsequent quarters."

Incomes remained flat in July after dropping 1.1% in June. That led to a 0.3% drop in purchases of non-durable goods. Consumer spending fell 1% in the second quarter.

And just as the Cash for Clunkers program bolstered consumer spending, the housing market was buttressed this summer by an $8,000 tax credit for first-time homebuyers. Existing home sales rose 7.2% to a 5.24 million annual rate in July - the most since August 2007.

However, the supposed "bottom" of the housing market might not have come so soon without the government tax credit, which is set to expire in November.

"I'm not seeing a tremendous amount of good news on the job or economic front, so I do think it's important that the [tax] credit get extended," Richard Dugas, chief executive officer of Pulte Homes Inc. (NYSE: PHM), told The Associated Press.

To be sure, job losses are trending down, but the losses being sustained are still chipping away at the American consumer and the economy as a whole.

"The economy is no longer detonating, but we are still losing jobs," David Rosenberg, chief economist at Gluskin Sheff + Associates Inc., said in an interview with Bloomberg Radio. "It's going to be a very tough environment for the consumer."

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