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Economic Forecasts

Government Job Cuts Crimping Economy

We still see net job gains for the year, but an unemployment rate staying stubbornly high.

A big storm is brewing this summer on the labor front. State and local governments beginning a new fiscal year will continue budget cuts and add to the ranks of the unemployed. Meanwhile, the economy’s tepid growth means that the private sector might not generate enough jobs to sustain what growth there is.

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We still think a recession will be avoided. But with GDP increasing around 1.5% annually and with the unemployment rate up to 9.2% in June, it feels like a recession to the 14 million who are out of work and the additional 8.5 million working part-time who want a full workweek.

By year-end, the unemployment rate isn’t likely to be much different than it is now. That’s because folks who lost their jobs grow discouraged and stop looking. As hiring increases, they try again to find work and that drives up the number of active job seekers, keeping the jobless rate elevated even as new jobs are being created.

Due to the abrupt slowdown in job growth during May and June, the total number of net new jobs this year will be closer to 1.5 million than the 2 million previously expected. About 747,000 jobs have been added through the first six months of this year. Despite a net increase of only 18,000 in June, there was hiring by health care, restaurants and hotels, accounting and other business services, and retail shops. But the net private sector increase of 57,000 was offset as governments cut 39,000 workers.

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