- The Washington Times - Monday, January 11, 2010

The biggest question looming over the economy is whether it will start to create enough jobs this year to keep the fragile recovery going.

Although the job market has steadied and is showing a dramatic improvement from early 2009 — when more than 700,000 jobs per month were disappearing — some analysts worry about a relapse into recession by the end of the year because of a lack of income and jobs that would prevent consumers from making steady gains in spending.

Economists generally expect the economy to plod forward and job growth to trickle back, replacing the drumbeat of job losses each month that has marked the worst two years for workers since the Great Depression. Job cuts dwindled to about 70,000 a month at the end of last year.

“I think we are on a path of … steady progress,” Christina Romer, who heads President Obama’s Council of Economic Advisers, said Sunday on ABC’s “This Week.”

“If you look at basically every forecast, they are saying steady GDP growth over 2010,” Mrs. Romer said. “The real question is going to be: Is it going to be strong enough to really add a lot of people back into employment? And that is what we are focusing on. … That’s got to be the top priority.”

David Wiedemer, chief economist for the Foresight Group, a consulting firm in Herndon, Va., said economists are being overly optimistic about job growth. He said they are not taking into account the extraordinary damage caused by the collapse of multiple investment bubbles in technology, stocks, housing and credit in the past decade, which have called into question whether the economy can ever again experience the same kind of growth in spending and jobs driven by easy credit.

“Unemployment does not reverse itself simply because a certain amount of time has passed,” he said. “We expect unemployment to continue to rise because the conditions necessary for job creation do not exist and will not exist for quite some time. There have to be reasons for significant job growth, and those reasons simply are not there.”

Employers are looking for a lasting revival of consumer demand before they increase hiring. American consumers, who powered the engine for economic growth in the U.S. and around the world for decades, have retrenched in the face of the severe recession. The U.S. economy has lost nearly 8 million jobs, with fears of more to come.

Instead of spending freely, consumers are building cushions of savings and are facing the deepest cuts in decades in all kinds of credit, from home equity loans to credit cards, economists say.

That means spending can accelerate only if jobs and wages — the main source of income for the majority of consumers — are revived. The smattering of growth at the end of last year — including a surprise spurt of 4,000 jobs created in November — was driven largely by government spending and borrowing, which has merely replaced spending and borrowing by the overstretched consumer, Mr. Wiedemer said.

“We’ve been relying on a somewhat artificial prosperity based on a multi-bubble economy,” he said. “As the bubbles continue to fall, massive stimulus spending will only kick these problems down the road and, in fact, make our later problems that much worse. At some point, we are not going to be able to borrow anymore and the party will be over.”

Mr. Wiedemer said the government’s debt splurge — doubling the supply of money in the past year and sending yearly budget deficits to well over $1 trillion — could be carrying the seeds of inflation, which would further limit the capacity for economic growth.

Sung Won Sohn, economics professor at California State University at Channel Islands, worries whether job growth will be vigorous enough to get the economy back on track.

“The labor market is not out of the woods yet,” he said.

News about the labor market has been so discouraging that 1.5 million people have simply dropped out in the past four months because they don’t think they’ll be able to find work. If these Americans remained in the work force, economists estimate, the unemployment rate would be about 10.5 percent rather than the reported number of about 10 percent.

The average duration of unemployment — 29.1 weeks — and the number of workers who have given up looking for jobs — 929,000 — are at record highs, according to the Labor Department.

“There is a growing concern about a double-dip recession,” said Mr. Sohn. “Toward the end of 2010, the bulk of the money from the economic stimulus program will be gone. The Federal Reserve will have embarked on an exit strategy and started hiking interest rates by then. And consumers are not likely to go on a spending spree any time soon. Even if they were willing to spend, credit won’t be available to support spending.”

Still, Mr. Sohn expects the economy to make it through this year with a little help from abroad.

“The economy is benefiting from strong global economic growth, especially in Asia,” he said. “China’s growth has exceeded all expectations and has become a locomotive for the world economy. America’s exports of high-tech and capital goods have increased nicely. Every $1 billion in exports create about 25,000 jobs in the U.S.”

Mr. Sohn noted that temporary employment also has risen in recent months, and that is often a harbinger of full-time job growth.

Temporary jobs grew by 47,000 in December and are up by 166,000 since July, according to the Labor Department. The 2.5 percent jump in temporary jobs from November to December was the biggest in 20 years.

“Businesses are reluctant to hire new employees until they are more confident in the economic recovery, instead preferring the work force flexibility offered by staffing firms,” said Richard Wahlquist, president of the American Staffing Association. “Because staffing employment is a leading employment indicator, the consistent trend of temporary-help job growth bodes well for overall job growth in the near future.”

Bernard Baumohl, chief global economist at the Economic Outlook Group, said he is encouraged by the trend in temporary jobs and is inclined to dismiss the pessimistic reports from the Labor Department. He said other reports show a revival of growth in manufacturing employment, recent pickups in home construction and a sharp decline in claims for jobless benefits.

“Year-end job figures are notoriously unreliable” and subject to big revisions, he said, noting that many of the 661,000 people who said they dropped out of the labor market last month may have felt it was simply too cold to go job hunting.

Wages continue to rise at a subdued 2.2 percent yearly rate, and disposable income has been increasing, he said.

“Americans are bringing in more take-home now than at any time since May of 2008,” he said. “It’s this composite picture — one of improving employment trends along with rising incomes — that will help sustain the economic recovery and prevent a double-dip recession.”

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