Despite stronger job growth, recovery still a long march

(MoneyWatch) Although analysts are likely to cheer the latest government jobs data as a sign the economy is gaining speed, the numbers obscure one thing: Even as parts of the U.S. economy recover in earnest, the job market remains generally flaccid. "It's stunning how long it will take to get back to a healthy job market given the status quo in the job numbers," said Heidi Shierholz, a labor economist with the Economic Policy Institute.

How long? Try 2020. At the current rate of job-creation, it will take roughly six years to close the gap in jobs lost during the recession that officially ended in June 2009 and the ensuing slow-mo recovery, according to the non-partisan think-tank. "There's this sense that we're improving and well on the way to recovery," she added. "But that's not what's happening on the ground."

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Total nonfarm payrolls grew by 195,000 in June, the U.S. Labor Department said Friday, surpassing consensus forecasts of 165,000. The unemployment rate remained at 7.6 percent. Monthly job gains have averaged 175,000 over the last year.

The government said job-creation in May and April topped previous estimates by 20,000 and 50,000 jobs, respectively. Yet even if job growth suddenly surged to 225,000 per month, the economy still wouldn't return to full employment until early 2018, Shierholz recently calculated using Congressional Budget Office data.

Investors worried about the Federal Reserve getting set to withdraw monetary support for the economy will now digest the June job growth. The uptick in job-creation could be seen as putting pressure on the central bank to begin tapering the huge monthly bond purchases that have pushed financial markets into record terrain this year.  

"Employment growth continues to look more than strong enough to keep unemployment trending down -- even though the rate was only flat in June -- and probably more than strong enough to lead to Fed tapering starting in September," said Jim O'Sullivan, chief U.S. economist with High Frequency Economics, in a research note.

Some of those fears eased over the last two days, as rallies in Asia and Europe were triggered by European Central Bank President Mario Draghi's statement that interest rates will remain low "for an extended period of time." The ECB statement was echoed by the Bank of England. And Fed officials themselves have gone out of their way over the last two weeks to reassure investors that they are not taking away the punch bowl anytime soon.

"We need to have several quarters of demonstrably solid growth in terms of jobs before [the Fed] starts to do anything material," said Michael Thompson, managing director with investment research firm S&P Capital IQ. When the central bank does start scaling back its bond purchases, it will do so "in thimbles," he predicted. "You might not even notice it's gone."

To be sure, in some ways the economy really is improving. The jobless rate, which was at 8.2 percent a year ago, has declined. The Fed forecasts that it will sink to between 6.5 percent and 6.8 percent by the end of 2014. Layoffs have slowed. Home prices and sales are rising, boosting household wealth and giving builders a reason to hire again to meet the growing demand for new construction. Consumer spending has remained vigorous, with sales of cars and other big-ticket items picking up. Even small businesses, perhaps the most beaten down of firms during the slump, are cautiously starting to hire, a major shot in the arm given that companies with fewer than 500 employees account for nearly half of all jobs in the U.S.

Frustratingly, however, these encouraging trends have yet to yield the robust job flow that typically follows recessions.

The U.S. economy has had 10 recessions since 1948. Until 1980, it took an average of nine months after these downturns ended, and never more than a year, for employment levels to snap back to normal. Then, for reasons that aren't fully understood, things changed. After the 1990-91 recession it took nearly two years for jobs to reach their pre-bust peak. Following the dot-com crash in 2001, it took 39 months.

Following the latest recession we are now at 48 months and counting -- the economy needs to add 8.5 million jobs to make up for the ones that were lost during the downturn and to account for new people joining the labor market.

Meanwhile, the decline in unemployment over the last year owes less to people at last finding work than to the discouraged hordes who have dropped out of the labor force altogether, including millions of long-term unemployed. Of the nearly 12 million Americans who remain out of a job, some 37 percent have been looking for work for at least seven months, according to the Center on Budget and Policy Priorities. 

Prospects for people who leave the workforce for a long time are grim. Skills atrophy. Professional contacts evaporate. Studies also show a persistent employer bias against the long-term unemployed. Even when workers finally do find work, it is often at a fraction of their former earnings.

If the slack in the job market has been tough on workers, it has burnished corporate profits by suppressing wage growth. There are roughly three unemployed workers for every available job, which means employers face little pressure to boost pay.

"In this market employees have a very limited ability to bargain for higher wages," Thompson said. "The economy's not strong enough, and they don't feel secure enough to push" for a raise.

To make things worse, the economy seems to be wilting in the unseasonably hot summer weather. The Commerce Department last week slashed its estimate of first-quarter growth. The U.S. economy expanded at an anemic 1.8 percent in the first three months of the year, much lower than the 2.4 percent rate initially forecast. Although most economists expect the swoon to be temporary and for growth to hit roughly 3 percent by early next year, for unemployed people the clock is ticking.

Help doesn't appear to be on the way. Congress remains locked in partisan combat, foreclosing the kind of large-scale fiscal spending that many experts believe would reinvigorate the economy. Meanwhile, the best Fed Chairman Ben Bernanke can do is vow to increase bond purchases if the economy loses momentum.

That pledge may comfort investors, but it does little for workers who need a job today, not six months -- let alone six years -- from now.

"This is a choice we're making -- it doesn't have to be this way," Shierholz said of Washington's response to the jobs crisis. "We need to be full steam ahead with mechanisms to stimulate demand."

Spending on infrastructure, education and other areas would strengthen job-creation and lift growth, according to many economists.