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Recession's job losses may take years to recoup

There’s growing optimism about signs of life in the economy as the pace of job losses slows.  But this recovery – when it comes – won’t feel like any in memory. By John W Schoen.

Friday's monthly jobs report — showing a slower pace of layoffs in July — adds to growing optimism about signs of life in the economy. But this recovery, when it comes, won’t feel like any in memory.

The reason is that consumers — the mainspring of the economy — remain hunkered down. Growth is still coming from cost-cutting and federal spending, not from a pickup in real demand. And with 7 million workers sidelined by this recession — bringing the total number of jobless to nearly 15 million — that headwind likely will be blowing for several years.

“We're not going to go back to where we've come from," said Mohamed El-Erian, CEO of PIMCO, a global investment management firm. "There's still an assumption out there in the marketplace that somehow this was a very nasty cyclical fall, and we're going to go back to where we've come from. That's not what’s going to happen.”

The government's report on employment — that employers cut 247,000 jobs in July, the fewest in a year — was better than expected and provided strong evidence that the wave of job cuts from the current recession may be winding down. The unemployment rate dipped to 9.4 percent, the first drop in 15 months.

The report follows other positive clues that the worst economic downturn since the Great Depression is easing. Last week, a series of reports offered hopeful signs that the housing market may be nearing the end of its economy-stopping collapse. A report by the Federal Reserve found that most of its 12 regional banks concluded that either the recession was easing or that economic activity had "begun to stabilize, albeit at a low level."

On Friday, the government's initial report on second-quarter gross domestic product showed the economy contracted by just 1 percent, a better-than-expected reading, after plunging by 6.4 percent in the first quarter.

All of which seems to have convinced stock market investors that happy days, if not here again already, are at least not too far down the road. Since its March low, the S&P 500 index — the broadest measure of stocks — is up nearly 50 percent.

Brown shoots
Those signs of economic stability follow an unprecedented government mobilization to head off a wider collapse: from the Fed’s trillion-dollar intervention in the financial markets to the Treasury’s massive bank bailout and the Obama administration’s $787 billion stimulus package. Other than massive government spending by the U.S. and other countries, though, the level of demand for goods and services needed to lead the economy out of recession hasn’t kicked in.

“There still is generally a picture of very weak final demand, especially in North America, Europe and Japan which are the primary industrialized countries still in recession,” said Brian Bethune, an economist at IHS Global Insight.

A major reason for that slack demand is that consumers, whose spending still accounts for two-thirds of GDP, remain hunkered down and show little sign of opening their wallets any time soon. Consumer confidence fell in July, and retailers Thursday reported another month of lousy sales results.

Consumer spending rose slightly in June for the second straight month, but incomes — the fuel for future spending — dropped by 1.3 percent. The savings rate dipped to 4.6 percent in June, but remained well above last year's 1 percent rate.

Falling home prices continue to erode consumers' wealth and sap their spending power. By 2011, roughly half of all American homeowners will be "underwater" - owing more on their mortgage than their home is worth, according to a report by analysts at Deutsche Bank.

Until real demand picks up, the large pool of workers sidelined by the recession will continue to have a hard time finding a job.

“Unless an individual company is in the position where they're really seeing their business pick up, they're very cautious about adding back,” said Tig Gilliam, CEO of staffing company Adecco North America. "And there are large companies out there who are going to come with big announcements still. We're not past the large announced layoff process yet, even in this cycle."

In the meantime, hundreds of thousands of unemployed workers face the loss of unemployment benefits as the recession drags on. The National Employment Law Project estimates that some 540,000 Americans will exhaust benefits by the end of September, and a 1.5 million will run out of coverage by the end of the year.

As of July, 4.4 million Americans had been out of work for more than six months, up from 2.6 million in February. Some 29 percent of jobless workers have been out of work for six months, a record since data were first reported in 1948, according to the NELP.

With unemployment stuck at high levels, jobless benefits running out and those consumers who have disposable income devoting more of it to savings, demand will likely remain sluggish.

Once companies do begin hiring again, it may be several years before overall employment reaches pre-recession levels. Roughly 125,000 new jobs are needed each month just to keep up with the growth of the work force.

So even if the economy quickly returned to the peak job creation performance of 2007, when the economy was adding roughly 400,000 new jobs a month, it would take more than two years to rehire the 7 million workers who lost their jobs to the recession.

Few economists expect a return to those 2007 growth levels any time soon. As demand picks up, companies will likely increase hours for part-time staff or bring back furloughed workers before creating new full-time jobs.

“We’re a long way from a recovery in new hiring,” said Bethune. “That's going to be a damper for the overall situation in the labor market.”

Analysts say some companies are also postponing hiring decisions until they get a better handle on the impact of new federal policies like healthcare reform.

So as the steep economic contraction that began 20 months ago begins to ease, analysts surveying the damage say the period following this recession may be like no other in recent memory: persistent high unemployment coupled with very weak growth. Though a return to growth is likely to mean the official end of the worst recession since the 1930s, it won’t feel like a recovery for millions of Americans.

“We can have muted growth,” said El-Erian. “We can have a nominal GDP in the 3 percent range. But that's not enough to stabilize the system. We have a system that has grown accustomed to 5, 6 percent nominal GDP. So we will have growth, but it will be timid. It will be what we call the ‘new normal.’"