Four Reasons Why Jobs Remain So Scarce

by: Rick Newman

Retail sales are inching up, manufacturing is on the upswing, and corporate profits are strong. But companies still aren't hiring and the unemployment rate is going up. What gives?

Economists have seen a few glimmers of hope recently, with consumers sticking their heads out of their shells and other parts of the economy finally showing signs of life. But the job market is one big exception to the trend. In the latest report, job creation fell from 172,000 in October to just 39,000 in November, an extremely weak number that doesn't even keep up with ordinary population growth. The total number of unemployed people ticked up to 15.1 million, and the unemployment rate rose from 9.6% to 9.8%. Some economists think it could peak above 10% next year, before beginning to drift downward for good.

Rising unemployment sounds like something you would associate with a recession, not a recovery. But while the countertrends in the job market are somewhat surprising, they're not really mysterious. Here's why the job numbers are going the wrong way at the moment:

The federal stimulus is petering out. As unpopular as it has been, the $800 billion stimulus plan passed in early 2009 provided a boost to the economy that preserved at least 1.4 million jobs, according to the Congressional Budget Office, and helped end the recession sooner than it would have wound down on its own. The majority of that money has now been spent, and the prospects for more stimulus spending seem dim. The effects of the stimulus show up in GDP growth, which ranged above 4% in late 2009 and early 2010, when the stimulus was in full force. GDP growth has since drifted back to 2.5%, where economists generally expect it to stay for most of 2011.

In terms of jobs, the best way to measure the phase-out of the stimulus is in state and local government, which have been shedding jobs and dragging down the economy more than most sectors. A lot of stimulus money went to states and cities, which helped them keep payrolls relatively stable during the recession. But so far in 2010, state and local governments have shed nearly 200,000 jobs. More layoffs are likely in 2011, since government budgets remain under severe pressure and the extra help from Washington is running out. State and local job cuts are a double downer: They sharply reduce hiring in a sector once thought to be "recessionproof," and they flood the market with fresh job seekers competing with the longer-term unemployed for what jobs there are.

Corporate profits won't stay stratospherically high. Corporate profits have soared over the last 12 months, and they reached record levels in the latest quarter. That's largely because of gargantuan layoffs that have slashed costs, combined with a modest pickup in revenue that has made big companies more efficient - and profitable - than ever. The obvious question is why don't companies use some of their cash to hire more workers?

There are a couple of answers. First, CEOs generally expect profits to fall in 2011, since the recovery is slowing down and most firms have cut all the workers they can possibly cut. So most firms are unlikely to get more efficient in the near future, and may get less efficient. Corporate bosses were also scarred by the 2008 financial panic, which left many companies struggling to raise routine capital used to meet payroll and keep the lights on. So they're building a war chest now that's meant to see them through the next crisis, not hire workers. That could happen sooner than expected: The risk of a meltdown in Europe's debt markets, a bursting asset bubble in China, or some other shock remains uncomfortably high, making most companies extremely cautious with their money.

Washington still doesn't inspire confidence. The Republican surge in the midterm elections was broadly interpreted as a business-friendly development, since Republicans are now in a position to block new regulations on business and support other measures likely to pad the bottom line. But gridlock may not be as good for business as Republicans would like to think. Businesses need clarity on tax levels for 2011, a huge issue that's unresolved as Republicans and Democrats jockey over whether to extend the Bush tax cuts for all taxpayers, or just the middle class. And that's a simple problem compared with the huge question of how to start paying down the $14 trillion national debt. Then there's the ongoing debate about what else Washington can do to juice the economy and guarantee that the recovery takes root.

On taxes and the debt, inaction could be the worst thing that happens. Many economists would also like to see additional stimulus, which Republicans seem determined to oppose. And some analysts worry that efforts to repeal President Obama's healthcare law could be a pointless sideshow that makes businesses more jittery, not less. "The effort to reverse or not fund healthcare reform would create uncertainty at a time when most biz leaders talk about the need to reduce uncertainty," says Alan Levenson, chief economist at investing firm T. Rowe Price.

Irrational pessimism. Job woes are clearly a major worry for consumers, but a lot of other things are better than depressed confidence levels suggest. Thanks to surging profits and lots of help from the Federal Reserve, many companies have rebounded surprisingly well from the ravages of the recession. They're in a good position to hire, once their business picks up in earnest, and they can also weather a fresh storm better than they could a few years ago. The stock market has also recovered nicely, and the price levels of stocks remain modest relative to earnings, which suggests that the rally could continue if there are no further shocks to the system. Banks have recovered from a near-death experience, which means lending should pick up. Interest rates are at historic lows and Americans have been paying down their debt. Inflation is also low, and recent gains in personal income suggest that Americans' purchasing power is improving. Even the ragged housing market may be close to bottoming out.

But many Americans don't feel those improvements yet, so a tiresome cycle continues. With consumers still skittish, spending remains below pre-recession levels. Companies, not sure if the recovery is real or fleeting, continue to keep their powder dry. We all wonder when hiring will pick up, and get discouraged when it doesn't. Maybe next month things will look brighter. Or the month after that. Or ...

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Disclosure: No positions