This Jobless Recovery Will Be Agonizing

Even once the layoffs taper off, it will be a long, long time before critical sectors like autos and housing begin hiring again.

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

February 6, 2009

The unemployment rate took a leap in January to 7.6% from 7.2% the month before and will be around 9% by year-end. More than 3 million jobs will disappear in 2009, and a fifth of those evaporated in the first month.

What matters most is what happens when the layoffs stop. Job creation in key sectors will be virtually nonexistent, especially in manufacturing and the industries that feed the housing sector.

In the 1981-82 recession -- the nation’s worst to hit the labor market since the Great Depression -- the jobless rate was 7.2% when the recession started and peaked at 10.8%. A total of 2.8 million jobs disappeared, and in the 12 months following the recession’s end, 3.1 million jobs were created. Granted, the workforce is far bigger today than it was in the early 1980s.

It’s worse this time around, however, and there won’t be a quick rehiring. Many who do get rehired will not receive the same pay or the same benefits after the recession ends. Since this recession began in December 2007, 3.6 million jobs have been cut, including 2.7 million in 2008 alone. Many high-paying jobs aren't likely to return for several years, especially in auto production, residential construction and financial services.

The drop in construction jobs of 684,000 over the past 12 months is the biggest yearly decline since 1943, says John Silvia, chief economist with Wachovia Corp. “This suggests an extensive revaluation of construction industry expectations for the years ahead. Housing starts will be a long way away from [the] 1.8 million of 2006 for a while," he says.

We know what a jobless recovery feels like, but this will be more painful. In the 2001 recession, 1.6 million jobs were eliminated. In the year after it ended, 562,000 jobs were slashed, and in the next 12 months, 193,000 more jobs were cut. It wasn’t until 2004 that more than 2 million jobs were added to the economy.

"It will take a recovery in automobiles and housing for the manufacturing sector to once again prosper," says Norbert J. Ore, chairman of the Institute for Supply Management Manufacturing Business Survey Committee, based on the comments of respondents in the committee’s monthly survey. And prospects for rebounds in those sectors are dim until 2010 or beyond, despite the federal government’s gargantuan efforts to stimulate the economy.

The job market is far weaker than the widely watched numbers indicate. Add in part-timers who want to work full-time and workers so discouraged that they've stopped looking, and the rate of underutilized workers is over 15%. The ranks of part-timers involuntarily working fewer hours continue to rise after jumping 73% last year to a record 8 million.

Businesses are slashing hours worked to a record low, The average workweek for hourly production workers last month remained at 33.3 hours, which is the lowest since the Department of Labor began tracking it in 1964. This is considered a signal of future unemployment, since companies tend to shorten workweeks before resorting to layoffs.

For now, job losses are hitting all sectors except health care and education. Together, those sectors added 54,000 jobs in January, but the gains were swamped by losses elsewhere. The drop in manufacturing jobs was especially large: 207,000, the biggest monthly decline since October 1982. Construction, both residential and commercial, lost 111,000. The sector has shed 1 million jobs in the past two years.

Not all is gloomy. The stimulus package working its way through Congress promises to create or save more than 3 million jobs over the next two years. There’s a great deal of political debate over whether that can be achieved. Meanwhile, the January report of purchasing managers in services, which make up about 80% of the workforce, shows a pickup in activity for the second straight month and increased orders, including exports. An index for employment, however, was unchanged.

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