Thursday, August 6, 2009

Prospects of a jobless recovery

From Kathleen Pender:

"The prospect of an economic recovery is growing stronger, but so are fears that unemployment could remain high for a prolonged period as it did during the previous two recessions.

If you are a U.S. manufacturer, you can't raise prices. The only way to increase profits is to cut costs," he says. One way to do that is to move production overseas.

Achuthan says that nonmanufacturing employment recovered quickly after the previous two recessions, but those gains were overwhelmed by job losses in manufacturing. "Ten years ago we had 18 million manufacturing jobs. Today we have 12 million.

What's different this time is that consumers, who are deeply in debt and have watched the value of their homes and investments plummet, might spend less than they normally would in a recovery, keeping a lid on job growth.

Another risk: Normally, when a recession includes a credit crisis, "the recovery is steep and drawn out," says Gary Schlossberg, a senior economist with Wells Capital Management. That suggests this recovery will be slow.

Economist Ed Yardeni expects "a very weak recovery in the labor market, even weaker than in the last recovery," he says.

Washington is throwing too many wrenches into the recovery mechanism. In the past it was simple: cut taxes and help the unemployed. We didn't use a recession to change all sorts of policies," such as health care, energy and union elections, he says. All this uncertainty could discourage hiring.

Yardeni also wonders "how we can have a sustainable recovery with the kind of deficits we are projecting. Normally deficits widen in recessions and narrow in recoveries. This time we are looking at structural deficits. That creates another layer of uncertainty."

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