Are We Headed Toward a Jobless Recovery?

Recent economic data suggest that payroll declines are slowing and that the job market is stabilizing, but the unemployment rate remains elevated and many Americans are still losing their jobs. The economy lost 216,000 jobs in August, fewer than in recent months, according to data released today by the Labor Department. But the unemployment rate, which had shown signs of leveling off, rose to 9.7% last month, its highest level since June 1983.

Until the labor market turns around, the phrase “economic recovery” will ring hollow to many Americans particularly those who have grown so discouraged that they're no longer looking for work; their ranks have doubled in the past year. For them, a jobless recovery, in which the gross domestic product rises but the job market remains tight, may not feel like much of a recovery at all. And analysts and advisors say their sentiment may be critical to broader and more expansive economic growth.

“There’s no such thing as a jobless recovery – we need jobs to have a recovery,” says Kevin Mahn, a managing director of Hennion & Walsh, an investment advisory firm. Mahn argues that people without jobs don’t spend money, and the economy is too dependent on consumer spending to recover without people returning to work.

“Until we start seeing positive signs in consumer spending and in the jobs market, we won’t see a sustainable recovery,” Mahn says. “If, in fact, we don’t see the consumer coming back to the table, we’re going to see degradation in corporate earnings in the third and fourth quarter,” he says.

Predictions of a jobless recovery were shaped in part by the trajectory of recent recessions. But this recovery could be different. Jobless recoveries like those of 1991 and 2001 followed relatively mild recessions, says John Canally, an economist at LPL Financial, a network of independent financial planners.

“What we had over the past year and a half was the most severe downturn since the 1930s,” Canally says. “Typically, when you get big downturns in the economy you get big recoveries. It’s almost like pulling back a rubber band,” he says. If the jobless rate falls over the next several months, it will prove that the economy is poised to recover strongly, Canally says.

Either way, the rate of recovery will have a lot to do with the American consumer. Consumer spending accounts for about two thirds of the gross domestic product. But personal spending has suffered not only from job losses but also from a loss of overall household wealth thanks to the decline in the stock market and home prices.

The hit to home prices makes this recession worse for average Americans than others in recent memory, says Dan Seiver, a finance professor at San Diego State University. “I still see a sputtering recovery because the damage that’s been done to households is the worst since the Great Depression,” Seiver says.

In past jobless recoveries, consumers got back to spending despite slow wage growth. “Consumers dealt with that by borrowing and running down their savings, and of course, those aren’t really options anymore,” Seiver says.

Most economists agree that the federal government and the Federal Reserve have tried to take the lessons of the Great Depression to heart by spending heavily on stimulus programs and bolstering banks to keep them lending, but some say state governments’ actions may continue to put a damper on the job market. “The Great Depression got worse because the Hoover administration wanted to balance the budget. And right now every state has a governor who’s acting like a little Hoover,” says David Levine, a professor of economics at the University of California, Berkely’s Haas School of Business.

“Every teacher who’s laid off isn’t paying state taxes [and] isn’t paying federal taxes,” Levine says. “And they’re not purchasing goods and services meaning that other Americans are losing their jobs.”

Putting Americans who have lost their jobs back to work will be difficult without some effort to retrain them for growing fields, Seiver says. “Over time, the nature of our economy changes, and some of the jobs that disappear don’t ever come back,” he says. “The new jobs will be disproportionately in the sunrise industries – technology and stuff like solar power [and] alternative energy.”