What a Jobless Recovery Means for the U.S.
As the economy continues to show some signs of improvement -- an uptick in home prices and sales, a significant stock market surge -- talk of a recovery grows, and we at Kiplinger continue to expect a modest one beginning later this year. But there's one area that shows very little improvement and that won't change for some time. The job market is in tough shape, with little reason for anyone out of work or eager to change jobs to be at all encouraged.
We're clearly headed for what economists call a jobless recovery. It won't be the first, but it'll be one of the worst.
The unemployment rate will fall very slowly, after peaking at over 10%, and it won't come close to the prerecession level of 4.9% for several years. There are several reasons for that.
For one thing, economic growth will be tepid for a long time. We expect gains of about 2% in the GDP in 2010 and little more than 3% in 2011. Compare that with 6.5% average annual growth in the first year after over U.S. recessions since World War II. It'll take years to reach that level of growth this time.
For another, the Federal Reserve can do little to help. After a recession, Fed policymakers typically cut short-term interest rates to juice up borrowing and spending. That can't happen this time. Interest rates are already near zero, and the Fed's strategy is to raise rates sometime next year to temper inflation,which is at risk of skyrocketing because of ballooning federal deficits and debt.
Plus the problem is more severe this time, with about 4.5 million jobs likely to be lost. Only 2.7 million disappeared as a result of the 2001 recession.It takes a net gain of 127,000 jobs a month to keep pace with population growth, so it's no wonder that it will take years to bring unemployment down this time.
And there's a definite cyclical effect to this. Just as slow growth means few new jobs will be created, continued high unemployment will slow growth. The more people out of work -- or worried about their job security -- the less they're likely to spend to boost the economic growth.