They may call this a recovery, but it doesn’t feel like one yet.
The economic climate is brutally productive, leaner and meaner every day. Those who have jobs feel less secure than in the 1990s. More is demanded from fewer workers. It is hard to find a clerk in a store these days. A spell of unemployment is apt to last longer.
There is improvement in profits, but businesses still are highly cautious in their investments with so much capacity to produce goods on hand. States are cutting back on services. Several weak airlines and telecommunications companies are just hanging on. The federal budget deficit is soaring, and so are health-care costs. Confidence still is shaky. The stock market rallies, then falters, then repeats the cycle again.
More than 2 million manufacturing jobs may have been lost for good during the post-boom retrenchment and era of cold global competition. Increasingly, service jobs that once were performed in the United States are being outsourced to low-wage countries. Call a bank’s customer-service department and a clerk in India is happy to help you. The trade deficit is draining away 5 percent of our economy to other countries. Our appetite for cheaper foreign goods is exacting an employment price.
Unlike during many past recoveries, inflation is close to zero across the economy, although in areas such as education and health care it is up sharply. There is fear of deflation, or sharply falling prices as during the Depression, by the Federal Reserve. Many manufacturing companies say they cannot raise prices with so much competition.
If this is a recovery, so far it is a recovery in a technical, definitional sense. And the question on the minds of economists is simple: Does it have legs? Or when all those tax-cut dollars are spent and the home refinancing boom is over, will the economy settle into a slow-growth torpor with a bigger joblessness problem than the country has witnessed in decades?
Few expect the U.S. economy to return to the glittering days of the late 1990s, when labor was in short supply and simply starting a dot-com business could attract millions in investments. No one sees a jobless rate as low as 3.9 percent anytime soon. (Although payroll jobs increased last month, the U.S. Labor Department reported, unemployment still is 6.1 percent.) But some analysts fret that the unemployment rate may not fall much at all because of high productivity and international competition.
The recovery is happening partly because Americans are using the tax cuts to do what they do best: shop. Also, housing prices are soaring as a result of lower interest rates. Business investment is up modestly as new orders for their goods have picked up. Profits also are better, even though many companies have disappointing bottom lines.
Because people have yet to go on strike in spending their money, the gross domestic product, the output of the nation’s goods and services, rose by 3.1 percent in the second quarter. It may reach 6 percent in the third quarter, said Michael Drury, an economist at Memphis-based McVean Trading and Investments. GDP, however, does not measure jobs, only the value of money changing hands.
Joyless rebound
This is not a recovery that truly lifts the spirits and increases job prospects as strong rebounds of past business cycles have. Not when you can find information technology workers who have been out of a job for more than two years. Not when companies don’t have exciting, breakthrough products that cause them to invest prodigiously. Not when people coming out of college have a hard time breaking in and have to live at home.
And the social safety net has seriously eroded, said Barry Bosworth, an economist at the Brookings Institution. Welfare reform worked in a good economy, he said, but does not work so well in a bad one. Qualifying for unemployment compensation is harder as a result of cutbacks in the program, he said.
The jobless rate is a little over 6 percent, but in reality unemployment is much higher, Bosworth said. Perhaps a million people are not being counted as unemployed because they have dropped out of the labor force and are not actively looking for work, he said.
The extra spending sparked by Bush’s tax cuts almost certainly will drive the economy higher in the second half of the year, Drury and Bosworth said. As to the critical question of whether growth will be high enough to force the unemployment rate down, Drury is optimistic and Bosworth is skeptical, reflecting a bipolar syndrome in their profession.
Productivity’s dark side
Everyone wants to know when a significant number of jobs will be created. Bosworth thinks the economy will have to grow at an extremely fast 6 percent annual rate for two years to achieve a significant reduction in joblessness. Productivity increases in the United States have been so high that businesses can stick with their current labor forces a lot longer than they have in the past, he said.
But 6 percent growth for two years would be difficult to achieve in today’s economy. Over the long haul, the economy’s potential for growth is estimated at 3 percent to 4 percent. Drury says the economy has to grow in that range to prevent unemployment from rising. Usually, in the early stages of recoveries, economies turn in faster-than-average performances, then settle down to longer-term trends.
If corporations aren’t more generous with hiring during the next year and a half, the sustainability of the recovery will become questionable as the effect of tax cuts wears off.
“If we don’t get that hiring that I think we are going to get, we spent a lot of money for nothing,” Drury said.
Weak companies a drain
This economic recovery is different for another reason. There wasn’t a major shakeout of weak corporations in a very mild recession in 2001. Some went into bankruptcy but have survived liquidation so far, partly because of action by the federal government to cut taxes and bail out a few industries, such as the airlines.
“When you don’t allow a shakeout of the weak sisters, it’s hard to gain traction on the upside,” Drury said. “So we have more weak sisters just hanging on, which is sort of like the Japanese system.”
The jobless figures show the toll on people. A fifth of the unemployed have been out of work for 26 weeks or longer. Even as the recovery proceeds, Bosworth said, many people are living through a tough transition in the job market. “For some people who don’t have jobs, this is a severe recession,” he added.
This recovery appears to be accompanied by some sizable structural economic changes, not only in the jobs market but also in the business world. Outsourcing has expanded dramatically. There are some companies that have grown up as non-union, all-purpose contract manufacturers, making widgets of all types for a variety of other companies.
The excesses of the boom are gone.
“With the collapse of the high-tech sector, there was an office boom that couldn’t be sustained,” Bosworth said. “Vacancy rates are very high. In some parts of the country, companies want to get out of the main cities. There’s no recovery in commercial real estate, and you shouldn’t be expecting one in the near future.”
Global ramifications
Yet America still is the engine of world economic growth, however uneven the recovery may be. Many analysts believe that our status as a locomotive has some problems. We are the consumers of last resort, running a large trade deficit with the rest of the world, which is content to lend us the capital to keep this merry-go-round of spending going and going.
One way to make American companies more competitive would be an even sharper decline in the value of the dollar against other currencies, especially against China’s currency. But the dollar devaluation so far has been limited. U.S. companies still complain that they are at a disadvantage internationally.
This recovery also has produced record budget deficits that many economists say will haunt the nation as the Baby Boomers begin retiring at the end of the decade. But there is no panic now. The aim at the moment is to pull out all stops to put this very unusual recovery on a sounder footing, and to hope that the medicine works.
