Weak employment market likely to outlast pickup in spending
Paul Sancya / APPeople filling out out applications for positions at a new bar and restaurant in Detroit. Until job losses reverse, the recovery likely will be tepid.
John W. SchoenSenior producerProfileEmail
updated 12:26 p.m. PT, Thurs., Oct. 1, 2009
There were some hopeful signs among the blizzard of economic data released this week. But the recovery from the worst downturn in decades remains hostage to one of the ugliest numbers on the list: the unemployment rate.
"The hole that has been blown in the labor market is absolutely enormous,” said Heidi Shierholz, an economist with the Economic Policy Institute.
That hole continues to widen. On Thursday, the Labor Department said initial claims for unemployment insurance rose to a seasonally adjusted 551,000 — up from 534,000 in the previous week and more than Wall Street economists expected.
The data followed a report Wednesday from payroll manager ADP showing that U.S. companies cut 254,000 jobs in September, also more than forecast. Government figures for September, including the official unemployment rate, will be released Friday morning.
The bad news on the job front has been partially offset by other signs that the economy may be on the mend. A private trade group said Thursday that manufacturing expanded for the second straight month in September, but at a slightly slower pace than in August and not as robustly as economists predicted. Construction spending also rose a bit in August.
And consumer spending, which accounts for 70 percent of total economic activity, jumped in August by the largest amount in nearly eight years, even though personal incomes continued to lag. Housing sales have also perked up this summer; pending sales of existing homes rose 6.4 percent in August.
But consumer spending and home buying have gotten a big boost from government programs like the hugely popular Cash for Clunkers car buying subsidies, which has expired, and the $8,000 first-time home buyer tax credit, which expires at the end of next month.
Indeed, auto sales at Ford and Chrysler dropped in September, showing that automakers were likely to have a tough time luring buyers into showrooms now that the clunkers program has ended.
Consumers may not be able to continue to boost spending without government subsidies — especially the nearly 7 million workers who have lost their jobs since the worst economic downturn since the Great Depression began in December 2007.
Even if the economy were to rebound sharply, the job market would have to create 400,000 jobs a month, every month, for two years to put those people back to work. Economists and government officials, including Federal Reserve Chairman Ben Bernanke, warn that the recovery will likely be very weak.
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"Even though from a technical perspective the recession is very likely over at this point,” he said last month, “it's still going to feel like a very weak economy for some time as many people will still find that their job security and their employment status is not what they wish it was.”
That view was echoed Wednesday by the chairman of Wal-Mart Stores Inc., who warned that the global economic recovery likely will be lethargic. The world's biggest retailer is betting on stronger growth potential in China and India.
"The world recovery is going to be led by Asia, although it's going to be very challenging. I think this recovery is going to be a slow one," Robson Walton told a global CEO business conference in Kuala Lampur, Malaysia. Walton, the eldest son of Wal-Mart founder Sam Walton, said "sales have been tough," even though the retailer was benefiting from the economic downturn as more people shop at discounters for bargains.
Battered household savings
Walton’s comments echoed remarks Tuesday in Singapore by General Electric chief executive Jeffrey Immelt, who warned that high unemployment and slower lending will drag on U.S. economic growth, likely resulting in the weakest recovery in decades. (Msnbc.com is a joint venture of Microsoft and GE’s NBC Universal unit.)
The recovery is also being dampened by an ongoing downturn in the commercial real estate market.
“Commercial real estate remains a very serious problem,” Bernanke told Congress Thursday. “We are concerned both because the fundamentals are weakening and because the financing situation is bad. That could provide a source of a lot of stress, particularly for small and regional banks that have a very heavy concentration in commercial real estate.”
The expected pickup in growth in the second half of the year is the result, in part, of companies rebuilding inventories that were cut sharply during the deepest trough of the recession. But overall demand may not rise soon to pre-recession levels.
So far, employers aren’t seeing much of a pop in demand, according to employment consultant Challenger, Challenger, Gray & Christmas, which surveys companies on layoffs plans.
“Declining demand is still the dominant reason (for layoffs),” said Rick Cobb, the company’s executive vice president. “It’s far and away above any of the other reasons given.”
High unemployment has placed a major drag on consumer spending; so has the beating households have taken on their savings and the drop in the value of their homes. Despite recent gains in the stock market, U.S. households have lost roughly $12 trillion in net worth since the recession began, according to the Federal Reserve’s flow of funds data.
“So cash that people do have — they're putting toward rebuilding their savings rather than spending,” said Shierholz. “It is going to be a long haul until we get consumer spending back up.”
With consumers tapped out, Uncle Sam has become the spender of last resort. As the $787 billion worth of tax cuts and spending projects works through the system, that money has helped move some of the key economic data into positive territory. But that impact will fade as government spending dries up.
That budget squeeze is already playing out at all but a handful of state and local governments. As state and local budgets are cut, spending falls, creating more layoffs. Unlike Congress, states and local governments can't borrow money to close budget gaps.