In the U.S., ‘the mother of all jobless recoveries’

When U.S. Federal Reserve chairman Ben Bernanke held court during his historic first press conference last week, he mentioned inflation, which is half of the central bank’s twin mandate, more than 80 times.

The other half of the mandate – employment – rated only 16 references. That’s partly because of the questions that were posed and partly because the central bank simply doesn’t have the weapons to tackle stubbornly high unemployment.

It also underscores the remarkable lack of enthusiasm in U.S. policy circles for attacking the most serious fallout from the housing and credit collapse and subsequent severe recession. Even as millions of Americans run out of extended jobless benefits, politicians at every level are turning their attention to belt-tightening and the Federal Reserve is again preoccupied with the risks of inflation.

The latest U.S. employment numbers due on Friday are expected to show slightly lower job creation in April and a jobless rate holding steady at 8.8 per cent. That’s an improvement over unemployment rates closer to 10 per cent late last year, but well above the Fed’s own target of about 5.5 per cent, something even the central bank doesn’t expect to see for at least another five years.

The Fed and most analysts predict these numbers will improve gradually over the next several years, in step with a continuing slow economic recovery. They are counting heavily on rising profits in the private sector translating into increased capital spending and job growth.

But that is simply an illusion, some prominent economists insist.

“This goes down really as the mother of all jobless recoveries,” said David Rosenberg, chief economist and strategist with Gluskin Sheff + Associates. “Especially when we’re still digging out of a hole. Barely a fifth of [U.S.] employment losses have been recouped. That’s a rarity for the second year of a recovery cycle. It’s never happened before.”

One huge obstacle to a quicker pace of U.S. job growth is the enormous cutbacks by debt-strapped state and local governments, whose share of total spending is 40 per cent larger than that of the private sector.

“I don’t think there’s a full appreciation that, outside of consumer spending, this is the largest contributor to GDP in the United States,” Mr. Rosenberg said in an interview. “You’re seeing incredible cuts that are going to continue, and not just at the local level.”

Even as local and state cuts level off, expected federal cutbacks stemming from budgetary tightening and an end to fiscal stimulus will almost certainly mean further job losses in the second half of the year.

Another impediment to a job recovery stems from the destruction in the U.S. housing market. Millions of Americans are stuck with negative equity in their homes, which means they can’t simply pick up and move elsewhere for employment without writing a big cheque to their lenders, Mr. Rosenberg noted.

So there goes some of the vaunted labour mobility that helped spark relatively quick U.S. job recoveries after previous recessions.

“Long-term unemployment, once rare in this country, has become all too normal,” economist Paul Krugman said in his latest New York Times column. “More than four million Americans have been out of work for a year or more.”MORE:
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The Globe and Mail
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