Obama Stuck with High Unemployment

Practical Economics

Obama Stuck with High Unemployment

The president’s job creation plan is up against some tough numbers.

Even if Congress agrees to a new economic stimulus plan, President Obama is likely to enter the final six months of his reelection campaign next year with an unemployment rate close to the current 9% level -- or possibly even higher.

SEE ALSO: Obama Fights to Save a Job -- His Own

That is because of the depth to which the economy has fallen, the continuing weakness of housing, consumer spending and business investment, and some factors that have made this slump different from any other since the 1930s.

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Congress probably won’t approve much of Obama’s $447-billion stimulus plan, which includes new infrastructure spending, an extension and expansion of this year’s payroll tax cuts, and more money for school repairs, teachers and first responders.


But even something close to that size won’t be enough to jolt the economy to life, say economists. It represents a fraction of the ground lost since the recession began in 2007 and won’t unleash new spending and investment, since so many consumers and businesspeople believe economic weakness will continue well past 2012.

That’s very bad news for an incumbent president who might survive a high jobless rate as long as voters believe that things are getting better. The jobs issue alone will saddle Obama with a serious negative against all but the most unelectable GOP candidates. The jobless rate will still be high in November 2012, and it won’t be coming down rapidly. Obama won’t be able to show improvement.

In 1984, President Ronald Reagan began the last six months of his reelection campaign with a jobless rate of 7.2%. Although the figure remained high, voters saw that the economy was improving from the 1981-1982 recession, which drove unemployment up to 10.8%. For Reagan’s successor, George H.W. Bush, the economy was actually getting stronger in 1992, but the statistics didn’t reflect that until too late. Bush lost.

The current unemployment rate of 9.1% is down from a recent peak of 10.1% but up from March. Although the number of new jobs rose respectably earlier this year, it began to taper off in May and was weak in June and July. The August statistics showed no change in employment levels at all.


The problem is that manufacturing, business investment, housing and job creation are all weak in large part because consumer spending -- 70% of economic activity -- isn’t taking off. Many consumers are still recovering from home-mortgage-related setbacks; others, laid off, are still struggling.

Economists say businesses are unlikely to begin hiring again until they see evidence that consumers (or other businesses) will be willing to buy their products or services, and that that in turn will increase profits. They’re also fraught with uncertainty about future costs and regulations. Exports are weak because the world economy is slowing.

Obama’s package doesn’t address any of those problems. Until those factors improve, the projected pace of job creation is unlikely to rise enough to make much of a dent in the unemployment rate. The U.S. must create an average of 120,000 jobs a month just to keep the rate from rising, and 280,000 a month to bring it visibly lower.

Labor Department figures for August showed that more than 13.9 million Americans were unemployed, 6 million for 27 weeks or more. Almost 9 million part-time workers wanted full-time jobs but couldn’t get them. And 977,000 Americans wanted work but had become so discouraged by the lack of jobs that they had stopped looking.


If the job picture does improve, it likely will prompt many of those discouraged workers -- a cumulative 6.5 million since the start of the recession -- to begin looking for jobs again. That, perversely, could send the unemployment rate rising slightly -- or at least make it more difficult to bring down.

Moreover, although Obama’s spending proposals are designed to take effect this year, it would take several months to have even a modest impact. Few construction projects are actually shovel ready. Even if a plan passed by Congress did spur some additional growth, given the usual lags until new stimulus takes hold, the impact probably would come too late.

Although stimulus programs can help jolt the economy out of a recession, it is mainly at the early stage of a recovery, as George W. Bush’s tax cut package did after the dot-com bust of 2000. By contrast, the current recovery began in mid-2009 and already has sputtered. Economists now worry that the United States could fall into another slump.

All that considered, the odds are slim that Obama will be able to show real progress in reducing the unemployment rate as he heads into the homestretch. And they’re getting slimmer as the slump persists. Republicans will have to nominate a solid candidate to unseat an incumbent president, but the bad economy has given them a big head start. Obama’s new job creation plan is a long shot to make up this disadvantage.