Unemployment Report Shows Sluggish Recovery Will Take Years to Replace Jobs Lost in Great Recession

Unemployment figures released Friday confirmed that the U.S. economy is still recovering, but they also showed it will take years to replace the 8 million jobs lost during the Great Recession.

And until meaningful hiring takes place, consumers are unlikely to loosen their purse strings, the key to putting the economy back on track to full recovery.

Employment fell in June for the first time this year, reflecting a drop in federal census workers and a smaller-than-forecast gain in private hiring.

Payrolls declined by 125,000 as the government cut 225,000 temporary workers conducting the 2010 census, Labor Department figures in Washington showed. Economists projected a decline of 130,000, according to the median forecast in a Bloomberg News survey. Private employers added 83,000 to their payrolls.

The recent slump in financial markets sparked by the European debt crisis raises the risk that hiring could slow even further, crimping spending by American consumers, who fuel 70% of economic activity.

"Overall, it's weak with very little breadth in new hiring," John Herrmann, a senior fixed-income strategist at State Street Global Markets in Boston, who forecast a gain in private payrolls of 88,000 told Bloomberg. "This will lead to second-half consumption growth well below the first half."

And even though the unemployment rate dropped from 9.7% to 9.5%, it was merely a reflection of hundreds of thousands of discouraged workers finally throwing in the towel on the job hunt.

Although the slight fall in the unemployment rate marked its lowest point since last July, it wasn't due to any improvement in the labor market. Instead, 652,000 jobless Americans dropped out of the labor force, making June's decline the sharpest one-month plunge in 15 years.

Whether they are frustrated with their job searches, or pursuing other options like school, over the past two months almost one million people simply stopped looking for work.

A string of disappointing reports on consumer spending, the housing market and factory activity has fueled fears that the economy is slipping back into a recession.

Manufacturing payrolls increased by 9,000 in June, the smallest gain this year and much smaller than a survey by Bloomberg thatpredicted an increase of 25,000. Growth in manufacturing jobs is seen as crucial to the recovery because the industry is expected to lead the U.S. economic expansion.

The Institute for Supply Management's overall manufacturing index fell from 59.7 in May to 56.2 in June, a much larger drop than predicted by economists, who were looking for a reading of 59.

Although any reading above 50 indicates an expansion in manufacturing activity, this is now the second consecutive monthly drop. Some components of the survey were particularly discouraging, with the export and new orders gauges dropping.

"This confirms a significant loss of momentum and suggests that recent consumer weakness may be spilling over to manufacturing as well," Aneta Markowska of Société Générale (OTC ADR: SCGLY) in New York told Bloomberg.

The National Association of Realtors reported Thursday that pending home sales tumbled by 30% in May, much worse than the 12.5% drop economists were looking for, renewing fears of a housing double-dip.

"If you're looking for a silver lining in housing, you aren't going to find it here. Demand has fallen off a cliff in the wake of the tax credit expiration," Mike Larson, interest rate and real estate analyst at Weiss Research told The Financial Times.

Employment at service-providers fell by 117,000. Construction companies cut payrolls by 22,000 after reducing 30,000 in May.

Still, while the jobs data was disappointing, most economists say the added jobs in the private sector signaled continued economic growth, albeit extremely sluggish.

"No double dip, but no rapid recovery either," John Silvia, chief economist at Wells Fargo in Charlotte, North Carolina told Reuters.

News & Related Story Links:

• Bloomberg:
  Payrolls in U.S. Fall 125,000; Jobless Rate at 9.5%
• Wall Street Journal:
  Why Did the Unemployment Rate Drop?
• Money Morning:
  Slowing Factory Output Suggests Global Economic Recovery May be Weakening
• Financial Times:
  Indicators suggest rebound in US faltering
• Reuters:
  Weak private hiring shows tepid recovery