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Jobs crisis eases

by Paul Wiseman
| November 7, 2010 8:00 PM

WASHINGTON - The jobs crisis eased just a bit last month as the American economy added 151,000 jobs, its best showing since April - yet still not enough to make a significant dent in unemployment.

In fact, the pace of job creation is still only about half of what it would take to have a noticeable effect on the jobless rate. So the big question remains: What will it take for businesses to hire that vigorously again, and when will that be?

The unemployment rate held steady for the third straight month at 9.6 percent in October, the government said Friday.

With Congress facing gridlock, some economists say it will be at least a year before companies gain enough confidence to start adding 300,000 new jobs a month, a sort of economic sweet spot. That's what it would take to reduce the unemployment rate by a full percentage point over a year.

"It could be another year or two," says Paul Ashworth, senior U.S. economist at Capital Economics. "Hopefully, I'm wrong and the economy catches fire, but you'd have to be a pretty brave man to predict that's going to happen.

For October, the private sector added 159,000 jobs, also its best performance since April. Retailers added 28,000 and health care firms 24,000. Financially ailing local governments shed 15,000 jobs.

Mark Zandi, chief economist at Moody's Analytics, holds out hope that "the preconditions are coming into place for much better job growth. Big companies, midsize companies are very profitable."

Zandi says those companies need to get over the shock of the recession and regain the confidence to start hiring again. That will probably take another year or so, he says. He thinks net job creation won't consistently hit the magic 300,000-a-month mark until 2012.

Job creation used to bounce back faster after recessions. When manufacturing occupied a bigger part of the economy, factories would quickly revive the labor market by recalling laid-off workers once conditions improved. After the severe 1981-82 recession, for instance, the economy generated 287,000 jobs a month in 1983 and 323,000 in 1984. Monthly growth exceeded 300,000 jobs 24 times in the 1980s.

Some months were especially explosive: in September 1983, the economy created 1.1 million jobs. In February 1984, it was 479,000.

But advances in automation and the development of a mainly service economy mean employers are slower to recall laid-off workers or hire new ones. Since 1983, the economy has tended to need a lot of time after a recession to create many new jobs. Not until 22 months after the 1990-1991 recession officially ended, for example, did job growth hit the 300,000-a-month mark. It took 28 months after the 2001 recession.

This year, with the Great Recession officially over since June 2009, the average gain is 87,400 jobs a month. At that pace, it would take until the end of 2017 to replace the 7.5 million jobs wiped out by the downturn that began in December 2007.

The aftermath of the housing crash and the financial crisis is still holding back the economy. Normally, when the economy starts to recover, low mortgage rates and pent-up demand for homes fuel a powerful rebound in housing. Homebuyers snap up appliances. Builders put up houses. Construction workers are hired.

That still isn't happening after the worst housing bust since the 1930s. The supply of unsold new homes on the market remains so vast it would take more than eight months, at the current sales pace, to exhaust. That's hardly a recipe for stepped-up construction.

Banks have also tightened lending standards. Fewer borrowers qualify for loans. Millions of families are stuck in houses worth less than what they owe on their mortgages and can't sell or refinance. Other households are slashing debts and cutting spending and are in no mood to buy.

The economy seems unlikely to get much help from the next Congress.

Republicans, who seized the House and gained seats in the Senate in Tuesday's midterm elections, have vowed to resist any further stimulus spending. They say the Obama administration's $814 billion stimulus program failed, though most economists say it kept the recession from worsening.

Republicans say they would help the economy by cutting business taxes and giving companies relief from over-regulation. John Makin, an economist with the conservative American Enterprise Institute, says Congress should suspend Social Security and Medicare payroll taxes for both individuals and businesses.

Lawmakers are expected to extend expiring tax cuts originally enacted during the administration of President George W. Bush. But that won't be anything new; it will just maintain the status quo.

Heidi Shierholz, economist at the liberal Employment Policy Institute, argues that the economy will continue to sputter unless the government steps in with more spending.

"Those just elected to Congress had better start coming up with solutions," says Diane Swonk, chief economist at Mesirow Financial, "or risk the same fate of this year's incumbents when they run for re-election in 2012."

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