Off the Path to Economic Recovery

By The New York Times | Editorial

09 March 13

he February employment report shows some notable improvements that, if sustained, would herald a real recovery. Partly boosted by increased employment in the construction industry, the number of new jobs jumped to 236,000 last month, continuing a gradual upward trend.

Unfortunately, there are many reasons to believe that the improvements will not be sustained. If Congressional Republicans have their way - insisting that all deficit reduction be achieved by spending less without any tax increases - the automatic cuts that began on March 1 will continue. That will cost the economy an estimated 750,000 jobs by the end of this year and reduce economic growth by about half a percentage point.

To absorb those blows, the economy would have to post strong growth despite the budget cutbacks. Lately, however, economic growth has been anemic, and it is hard to see where renewed growth will come from.

Housing? Car sales? Probably not. If job growth stalls, the housing market also could stall, as its resurgence has generally followed, not led, the job market. Ditto for car sales.

The stock market? Again, probably not. The rising stock market is largely attributable to monetary stimulus measures from the Federal Reserve, which buy time for the economy to recover but are not a cure-all for slow growth. That is especially true at times, such as now, when fiscal policy, by emphasizing budget cutbacks, is working at cross purposes to the Fed.

Rising wages? Certainly not. With millions of people still out of work, employers face little pressure to give raises, even as productivity gains allow them to increase profits. The result is increasing inequality. As a percentage of national income, corporate profits recently stood at their largest share at any time since 1950, while the portion of income that flows to employees was near its lowest point in nearly 50 years.

It is true that the unemployment rate has headed down, from 8.3 percent a year ago to 7.7 percent last month. But most of the decline reflects a shrinking labor force rather than new hiring. In fact, if hiring were more robust, the unemployment rate would hold steady or even rise as an estimated four million Americans who are not working or looking for work rejoined the ranks of job seekers, where they would be counted in the official unemployment rate. Worse, the share of unemployed workers who have been out of work for more than six months actually increased last month, from 38.1 percent in January to 40.2 percent, a ruinous situation for millions of families.

Nor is unemployment confined to the unskilled and undereducated. The jobless rate of workers with college degrees is still substantially higher than before the recession. For college-educated workers under age 25, the jobless rate has averaged 8.1 percent over the past year, compared with 5.4 percent in 2007, before the recession. For for those over age 25, it was 3.8 percent in February, compared with 2 percent before the recession. That is a strong indication that unemployment is elevated not because workers are unskilled, but because there is still not enough consumer demand to make hiring worthwhile.

Without adequate demand, there will be no upsurge in business investment. The Fed cannot turn things around on its own. And the automatic budget cuts, on top of it all, will only make things worse.