When Will The Jobs Come Back? Outlook Is Cloudy

Amid some long-awaited signs that the U.S. economy finally may be hitting bottom and is poised for a recovery, the outlook for jobs is not quite as rosy.

Indeed, just one day after the Federal Reserve announced that the U.S. economy appears to be "leveling out," the U.S. government released sobering data showing that unemployment claims rose more than expected last week and retail sales fell slightly in July.

With the number of Americans receiving unemployment compensation topping 9 million, there is growing concern about how quickly, if at all, the job market could rebound. "I don't think it's going to be a jobless recovery," says Henry Farber, a labor economist at Princeton University. "But I don't see any real signs of a recovery in the labor market yet."

Job Growth This Year?

When the jobless rate dipped in July for the first time in 15 months, to 9.4 percent, the news sparked hopes that unemployment had stopped rising. But many economists and the White House still predict that the rate could hit 10 percent before the end of the year.

"It's too early to call it a peak just yet," says Mary Daly, a research economist at the Federal Reserve Bank of San Francisco.

Economists agree that job growth always lags behind many other measures of economic activity, such as gross domestic product. One ugly scenario would be a repeat of the 2001 recession and its aftermath: It took more than 18 months for the economic recovery to produce sustained job gains, notes Ken Matheny, a senior economist at St. Louis-based Macroeconomic Advisers LLC.

This time, however, he is more optimistic, saying he even expects one or two months of job growth before 2009 is over. "What we suspect will happen is that this recovery might be kind of sluggish early on, but all in all, it will be a pretty decent recovery, particularly as we get into next year," says Matheny. "Next year, we expect a more sustainable recovery and a firmly rising trend for employment."

Not everyone is so sanguine. "We're stuck with very high unemployment in spite of the continuing stimulus over the next year," says Lawrence Mishel, president of the Economic Policy Institute, a Washington think tank. "Jobs will continue to decline for many months to come, and unemployment will be rising over the next year or more. I estimate that a third of the workforce will spend some period of time unemployed or underemployed in the next 12 months."

The Conference Board, a private research group, recently concluded that significant job growth is unlikely in the next 12 months. Its Employment Trends Index, which tracks a range of labor-market indicators, has been flat for the past three months.

Underemployed May Be Called Back First

There are some unusual factors about this recession that could restrain companies from hiring large numbers of new workers. A recent San Francisco Fed analysis pointed out that the number of employees who are involuntarily working part time, including furloughs and other reductions, is at an all-time high.

"This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing workforces rather than hire new workers," the bank concluded. "This could substantially slow the recovery and put upward pressure on future unemployment rates."

An extended stretch of unemployment could end up dampening a nascent economic recovery. For one thing, the U.S. economy remains heavily dependent on consumer spending.

"If we have a continued increase in unemployment or a prolonged lag in the recovery of employment, you could see an effect on GDP, as the weakness in employment feeds back through and dampens consumer spending and puts additional pressure on the housing market," Daly said.

Strained Government Resources For Jobless

In addition, as many as 1.5 million Americans receiving unemployment compensation are at risk of exhausting their benefits, according to projections from the National Employment Law Project, a private policy research group. If those payments are cut off, the economy could take another hit.

Even if the federal government decides to extend coverage, states will struggle to afford it.

As many as 18 states have already been forced to borrow from the federal government to cover the costs of unemployment claims, a figure that is likely to rise in the coming months. These spiraling costs are forcing other cuts at the state level.

"As the recession knocks out revenues and forces more spending, they cut programs, and they are actually exacerbating the recession," says Mishel of the Economic Policy Institute.

If the U.S. economy is indeed beginning to emerge from the recession, it will take several months to determine whether the recovery is stimulating the job market.

Then again, as Farber notes, "As a labor economist, I think that if there are no jobs, it's not a recovery."

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