Recession's job losses may take years to recoup

John W. Schoen Senior producer • Profile • E-mail

Friday's monthly jobs report — showing a slower pace of layoffs in July — adds to growing optimism about signs of life in the economy. But this recovery, when it comes, won’t feel like any in memory.

The reason is that consumers — the mainspring of the economy — remain hunkered down. Growth is still coming from cost-cutting and federal spending, not from a pickup in real demand. And with 7 million workers sidelined by this recession — bringing the total number of jobless to nearly 15 million — that headwind likely will be blowing for several years.

“We're not going to go back to where we've come from," said Mohamed El-Erian, CEO of PIMCO, a global investment management firm. "There's still an assumption out there in the marketplace that somehow this was a very nasty cyclical fall, and we're going to go back to where we've come from. That's not what’s going to happen.”

The government's report on employment — that employers cut 247,000 jobs in July, the fewest in a year — was better than expected and provided strong evidence that the wave of job cuts from the current recession may be winding down. The unemployment rate dipped to 9.4 percent, the first drop in 15 months.

The report follows other positive clues that the worst economic downturn since the Great Depression is easing. Last week, a series of reports offered hopeful signs that the housing market may be nearing the end of its economy-stopping collapse. A report by the Federal Reserve found that most of its 12 regional banks concluded that either the recession was easing or that economic activity had "begun to stabilize, albeit at a low level."

On Friday, the government's initial report on second-quarter gross domestic product showed the economy contracted by just 1 percent, a better-than-expected reading, after plunging by 6.4 percent in the first quarter.

All of which seems to have convinced stock market investors that happy days, if not here again already, are at least not too far down the road. Since its March low, the S&P 500 index — the broadest measure of stocks — is up nearly 50 percent.

Brown shoots
Those signs of economic stability follow an unprecedented government mobilization to head off a wider collapse: from the Fed’s trillion-dollar intervention in the financial markets to the Treasury’s massive bank bailout and the Obama administration’s $787 billion stimulus package. Other than massive government spending by the U.S. and other countries, though, the level of demand for goods and services needed to lead the economy out of recession hasn’t kicked in.

“There still is generally a picture of very weak final demand, especially in North America, Europe and Japan which are the primary industrialized countries still in recession,” said Brian Bethune, an economist at IHS Global Insight.

A major reason for that slack demand is that consumers, whose spending still accounts for two-thirds of GDP, remain hunkered down and show little sign of opening their wallets any time soon. Consumer confidence fell in July, and retailers Thursday reported another month of lousy sales results.

Consumer spending rose slightly in June for the second straight month, but incomes — the fuel for future spending — dropped by 1.3 percent. The savings rate dipped to 4.6 percent in June, but remained well above last year's 1 percent rate.

Falling home prices continue to erode consumers' wealth and sap their spending power. By 2011, roughly half of all American homeowners will be "underwater" - owing more on their mortgage than their home is worth, according to a report by analysts at Deutsche Bank.

Until real demand picks up, the large pool of workers sidelined by the recession will continue to have a hard time finding a job.

“Unless an individual company is in the position where they're really seeing their business pick up, they're very cautious about adding back,” said Tig Gilliam, CEO of staffing company Adecco North America. "And there are large companies out there who are going to come with big announcements still. We're not past the large announced layoff process yet, even in this cycle."

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