Friday, February 11, 2011

The US Economy's Looming Job Creation Challenge

I began to consider risks to a robust US economic recovery in this recent post, in which I noted,

"But if commodity input costs are rising, that will result in either lower margins and a curtailment of job growth, or higher prices which will cause lower quantity demand by consumers in the face of so much inflation.

One is somehow left feeling that there's considerably more economic turmoil ahead than many pundits would have us believe. We're seeing the first reactions by businesses to known inflation in input costs. How and where those costs, and the actions they have spurred, find their way into consumer prices, and how consumers react with their buying behavior, isn't being widely discussed.

However, with job growth still anemic, and US unemployment still uncomfortably high, will the Fed dare to raise rates? And would that not result in a stalled economy and job growth as higher rates choke demand?"
In an editorial in yesterday's edition of the Wall Street Journal, entitled Doing the Math on a Jobless Recovery, Brad Schiller explored the job growth component of the putative, but weak, US economic recovery.
An economics professor at the University of Nevada, he wrote, in part,
"The latest employment reports have not been encouraging. At the rate of 36,000 new jobs a month—the number gained in January—we will never get back to full employment. Even if we keep adding jobs at the December rate of 121,000 new jobs, we wouldn't achieve full employment in this millennium.
At the trend growth rate of 1.2% annually, we get another 1.8 million labor force participants a year, and with them, the need for another 1.8 million new jobs.

To get back to full employment tomorrow, we could get by with another seven million new jobs. To reach full employment by the end of this year, we would need at least nine million new jobs (some 750,000 a month). There's simply no way we will experience that kind of job creation.

Each year brings another two million-plus workers to the labor force (new workers plus the re-entry of discouraged workers). Thus we would need monthly job gains of 460,000 to achieve full employment in time for the 2012 presidential elections.

We created that many jobs one time in the last four years (May 2010)."
I edited out Schiller's more overtly political conclusions. But what he makes painfully clear is that there's just no prospect of sufficiently robust employment growth anytime soon that will bring unemployment, as dynamically calculated going forward, into a range that would allow the Fed to declare full-employment victory.
If that's true, then it means the Fed might hold rates too low for some time, stoking commodity-based inflation. If not, and the Fed raises rates, then, according to Schiller's calculations, unemployment is likely to remain distressingly high.
Then you have a persistent drag on US economic growth of a significant part of the workforce being unemployed. Will this not affect overall demand? That
Like it or not, we seem to have wandered back into the bad old days of Carter-era economics: high unemployment, prospects of higher inflation, and a need to raise rates in the face of a less-than-robustly-healthy US economy.

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