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Joyless, jobless recovery

Despite a discouraging employment report, the latest mixed bag of data has not been bad enough to derail projections of economic improvement in the second half. By Martin Wolk.
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Maybe this is the best we can hope for right now — an economic recovery that slowly grinds on without creating jobs, discouraging millions of job seekers. Friday’s employment report certainly was disappointing, marking the sixth straight month the economy has lost jobs, but the latest mixed bag of data has not been bad enough to derail projections of improvement in the second half.

The weak labor market clearly remains one of the biggest risks to the struggling economy, along with rising long-term interest rates that threaten to undermine the housing market. The economy cannot continue growing indefinitely without creating new jobs that lead to improved demand, and a significant further increase in mortgage rates would sap demand for housing and related products.

Yet most economists, encouraged by recent hints of rising growth, cling to the view that the latest round of tax cuts and tax refund checks should be enough to keep the economy on a modestly improving path.

“I’m still reasonably optimistic about the second half,” said Sung Won Sohn, chief economist for Wells Fargo. “I’m counting on the Bush tax cut to add 1 percent to economic growth in the second half. That is going to be a major thrust.”

Still, he called Friday’s jobs report “truly discouraging.”

Although the unemployment rate dipped to 6.2 percent from June’s 6.4 percent — a nine-year high — the generally more reliable survey of business establishments showed the economy lost another 44,000 jobs in July. The figure surprised analysts, who generally expected modest growth in payrolls.

“My thought is that we are dealing more with longer-term, structural problems, as Japan is, as Germany is,” Sohn said. “So perhaps the jobless economic recovery will go on much longer than we expected.”

Rich Yamarone, chief of economic research at Argus, agreed, noting the continued exodus of increasingly high-paid U.S. jobs to countries that offer far cheaper labor sources like China, India and the Philippines. In the past two weeks alone Boeing, Eastman Kodak, Pillowtex and May Department Stores have announced plans to eliminate a combined 20,000 workers, he noted.

“You cannot have a full-fledged recovery without job creation, and to date we have had no job creation,” he said.

The fundamental inconsistency in the economy was underscored this week by the government’s report showing that the gross domestic product grew by 2.4 percent in the second quarter, much better than expected, even though the economy shed 170,000 jobs in the three-month period. Rising productivity allows fewer workers to produce more goods and services, but only up to a point.

“Obviously if you continue GDP growing and employment declining, at the end of the day everything is being produced by nobody,” Federal Reserve Chairman Alan Greenspan noted dryly last month.

Moreover, if you scratch beneath the surface of the GDP numbers they are even weaker than the relatively modest 2.4 percent growth rate would indicate. Federal spending rose 25 percent in the quarter, boosted by a 44 percent war-related increase in defense spending that is unlikely to be repeated in coming quarters. Spending by cash-strapped state and local governments, a far bigger part of the economy, fell 1.5 percent in the quarter.

Consumer spending, which accounts for 70 percent of GDP, was up a healthy 3.3. percent in the quarter, reflecting steady income growth for the 130 million Americans who are employed.

Another positive sign for the economy was a monthly survey from the Institute for Supply Management, indicating that output from the hard-hit manufacturing sector rose in July for the first time in five months. Yet the manufacturing sector has been losing jobs for more than three years, and there are no indications yet that the trend has been reversed. Only 14 percent of manufacturers in the survey reported that employment rose in July, while 21 percent said employment declined.

“The data overall are showing some kind of pickup, but the data are certainly inconclusive of whether it’s going to be a strong or moderate recovery,” said Ethan Harris, chief economist of Lehman Bros. “It’s not going to be until the fourth quarter that we’re going to see real improvement in the labor market.”

Harris raised the concern that the nation’s long-term unemployment rate may be rising, meaning a growing number of chronically unemployed people who lack the job skills to re-enter the labor force. Such chronic unemployment is a fact of life in Europe, where the jobless rate has remained stuck over 8 percent for two decades.

U.S. concern about unemployment was probably behind a surprising loss of consumer confidence reported this week by the Conference Board, a research group. A separate monthly survey on consumer sentiment released Friday showed a slight improvement.

Like many economists Harris is more concerned about the sell-off in the bond market that has sent mortgage and other long-term interest rates sharply higher since mid-June. “You’re in the early stages of this recovery, and you don’t want to see rates rocketing upward at this stage,” he said. “If they keep selling off like this we will change our growth forecast.”

Goldman Sachs senior economist Jan Hatzius estimated that if long-term interest rates stabilize near current levels, the impact would cut consumer spending growth by 1 percent next year, pushing the economy below its long-term target growth rate, generally estimated between 3 and 4 percent.

Others think the concern about rising interest rates is overblown, pointing out that rates on the benchmark 10-year Treasury note, currently at 4.4 percent, have backed up only to mid-2002 levels, still low by historical standards.

Even if the yield on the 10-year note rises to 6 percent, pushing 30-year mortgage rates to 8 percent, the impact would cut into GDP growth by less than 1 percent, calculates Sohn. And that should be more than offset by President Bush’s tax-cut package, which will pour $210 billion into the economy by the end of next year.