The economy’s silver lining instead may be a bolt of lightening. That is the ominous message the latest jobs report seems to be offering. While it seems incongruous with the many economic indicators showing an end to the recession, it was entirely consistent with the many hurdles facing the economy’s return to pre-recession levels. The biggest of these obstacles may be our own expectations.
Prior to the May jobs report, economists had predicted upwards of 500,000 jobs being created. The actual news fell far short. Just 430,000 new jobs materialized and of these, 410,000 – 95 percent – were temporary Census jobs.
Consternation over the stubbornness of the unemployment rate (still at 9.7 percent, even with the inclusion of those temporary Census jobs) contrasts with economic statistics that have most financial observers saying the recession is over. This dissonance is enough to leave the layman asking: What gives?
It is important to distinguish between the economic reports. Economic statistics are, for the most part, showing current economic conditions. Job-creation is more forward-looking. And what many see looking forward is less than reassuring.
Firms have many alternatives to simply hiring more workers to keep up with an increase in demand – increasing hours of existing employees and adding new equipment instead of new employees are both easy alternatives. Many companies are doing so, and who can blame them? Consider just the visible problems on the horizon.
The latest body blow to world financial markets came from Europe, not the U.S. Greece, which hasn’t been a major actor on the world stage since Herodotus, caused global repercussions with its debt crisis. Greater crisis was averted, not with reform, but with the infusion of outside money. What lesson do others take from this course in moral hazard?
The E.U. need not wait long for an answer. Portugal and Spain appear the next “debtor dominoes” likely to fall. Europe is already making preparations with roughly $1 trillion in bailout boodle being set aside for its next debt emergency.
And if the caboose of the world’s economic train could cause a near derailment, how much more so the engine? The U.S. should close the books on another $1 trillion+ deficit in less than four months. With no end easily in sight, government debt fears are real economic worries – now and going forward.
The implications of these debt fears are no less troubling. In Washington, debt and deficits too often equal taxes and lower growth. Those predisposed to so worry can begin right away. At year’s end, taxes are set to increase as the 2001 tax cuts expire.
Domestic policy offers no greater comfort. Healthcare reform presents another unknown for business. It is little wonder employers are hesitant to add personnel when one of payroll’s key costs is so unclear. Financial regulatory reform applies the same question mark to another aspect of businesses’ costs. While the political unknown par excellence is what outcome November’s elections will have on policy.
On the monetary policy front, the economic growth seen so far has all taken place with interest rates effectively zero. Rates have nowhere to go but up. If zero has not sufficiently energized the economy thus far, what will higher rates do?
The recent spate of labor strikes in China potentially portends a change in the prevailing monetary dynamic. Cheap imports have helped stem inflationary pressures on one hand. On the other, Chinese demand for U.S. debt has enabled the Fed to keep interest rates low at home. If China’s strikes signal an end to its cheap labor, will higher priced goods fuel inflationary pressure? And will China’s low wage replacement be as accommodating in buying U.S. debt?
It is increasingly clear there are ample reasons to question the recovery. Even more importantly, it is clear the end of the recession and the recovery of the economy are two very different things.
It is not simply quite possible the recession will end without the economy recovering its pre-recession clip, it is highly unlikely that it will do otherwise. Previously fueled by a “wealth effect,” a prolonged and severe recession has left its mark.
We can expect the economy to be harnessed to a “poverty effect” for some time. The economy’s growth trajectory has been lowered. Certainly it can attain its old highs but not at its old rates. We have essentially traded in an 8-cylinder for a 6-cylinder car. The 6-cylinder can reach the same speeds, in some cases, but it will always take longer to do it.
America’s post-recession economy will not be what its pre-recession economy was any time soon. We have traded performance for safety. There are some positives to this. The problem is we still have 8-cylinder expectations that are now traveling on a 6-cylinder engine.