Opinion: The Great American Uncertainty
Sluggish growth in the job market has the nation -- and New Jersey -- deeply uncertain about the strength of the recovery.
In 2008, the Great Recession unfolded, reaching its full force at the start of 2009. By the end of the year, the likelihood of economic Armageddon had passed, and a Great Stabilization had been achieved. That led to 2010's Great Expectations, but they faltered in the spring as the European debt crisis intensified, leading to fears of a Great Stall. Fortunately, the stall didn’t materialize. Unfortunately, economic growth has fluctuated and remained below levels required to reduce significantly a stubbornly high unemployment rate -- leading to America’s Great Uncertainty in 2011.
December 2010, marks the 36-month anniversary of the start of the Great Recession. It also marks the 18-month anniversary of the start of the economic recovery. Both milestones are determined by the National Bureau of Economic Research (NBER), the nonprofit, nonpartisan research organization that tells us when recessions start and stop.
Despite the official dates, very few New Jerseyans feel certain that we are now a year and a half into economic recovery. Understandably so, since many remain unemployed or underemployed, and a number of economic sectors, such as housing and construction, are still reeling.
A key dimension of this uncertainty is the sluggish improvement in the employment market. Nationally, private-sector employment growth for the first 11 months of 2010 totals 1.2 million jobs. That compares with a loss of 4.6 million private-sector jobs for the first 11 months of 2009.
The 2010 job increase is a welcome and dramatic turnaround. But it remains a very modest pace of expansion, with significant implications going forward.
During 2008 and 2009, the nation lost 8.5 million private-sector jobs. Those are the two worst annual employment declines since payroll employment statistics were first compiled in 1939. If the slow growth of 2010 is extrapolated into the future, it will take the nation well into 2016 to recapture all of the employment losses suffered during 2008 and 2009.
Such a time horizon is both economically and politically unacceptable. Far higher job growth is necessary to speed the economic recovery. What's more, with approximately 1.2 million demographically driven potential entrants into the labor force from 2008 to 2016, current and future labor market uncertainties have been exacerbated.
Compounding this uneasiness is the type of jobs gained during 2010. Increases have been predominantly in below-average-paying industries, with very weak gains in higher-paying knowledge-based positions. This reality is reflected in the stubbornly high vacancy rates in most of the nation’s office markets, and this is also true in New Jersey.
The bottom line: the nation’s economy is far from achieving robust and sustained job growth for white-collar positions. This raises uncertainty about whether the jobs of America’s knowledge-based economy will face the same fate as the jobs of the industrial-based economy of the past.
Why have we had anemic and bottom-heavy job growth? One reason is that deep financial crises historically have been followed by long, painfully slow recovery periods. After the housing and credit bubbles of the mid 2000s, the nation was enveloped in 2008-2009 by the worst global financial crisis since the Great Depression. The lessons of history suggest that labor markets will be bouncing along an employment bottom for an extended period.
In addition, an era of household financial retrenchment continues to unfold. The United States had been living the debt-fired dream of consumption without end, fueled by cheap plastic credit and the use of housing as an ATM machine. Excessive consumer appetites for discretionary goods and services prevailed.
But, the nation’s extraordinary spending binge -- which was at the heart of global financial flow imbalances -- was not sustainable. Just like financial institutions, households are now being forced to deleverage and recapitalize. Income constraints, job declines and losses in housing and equity markets have trumped consumers’ desires to live far beyond their means. Higher savings rates now characterize American households, constraining the prospects of a strong consumption rebound.
Given the tepid pace of new demand in the United States, the nation’s businesses remain focused on cutting costs and adapting to new cost-conscious American consumers, making them reluctant to increase hiring and hence labor costs. Instead, U.S. corporations are increasingly focusing on global growth markets, directing more and more of their new investment and personnel to serve the higher growth in domestic demand in those areas. This focus is given further impetus by the improving quality of highly affordable, highly-educated labor in global growth markets. That enables R&D activity, as well as production, to be undertaken in those growth markets, leading to less demand for high-end jobs in America.
Much of the U.S.'s information-processing can also be shifted abroad with significant cost savings. Just as China has become the global factory floor, India is becoming the world’s backoffice, drawing paper-processing and consumer-management functions from America.
The nation’s employment growth has also been constrained by uncertainty about healthcare costs and regulations, income tax rates, dividend and capital gains rates, estate taxes, and the sustainability and strength of the economic recovery.
All these concerns have made employers reluctant to add jobs. At the same time, U.S. corporations are sitting on record amounts of cash -- estimated at $1.8 trillion -- that could be used for business expansion, both labor and capital. Further, the lending and credit environment remains difficult for small business startups, a significant source of job expansion. Also constraining small business is the same tepid growth of consumer and business demand.
Concurrently, the bursting of the housing bubble has pushed shelter production to all-time lows. Thus, the housing locomotive, a typical post-recession growth force, is sitting on the siding, negatively impacting not only construction employment, but the many other sectors of the economy tied to housing. Foreclosures continue to add inventory to housing markets, putting further downward pressure on prices and homeowner balance sheets. Weak job markets dampen housing demand, completing a negative cycle. The question is: How strong can an economic recovery be without a solidly improving housing sector?
Moreover, stimulus-spending leakage may have lessened job creation. Past stimulus programs mainly benefited domestically produced goods and services, because foreign penetration of U.S. markets was much smaller. Today, a much greater market penetration causes significant consumer- and business-spending leakage to overseas producers.
It may be that a new fiscal stimulus will be forthcoming as President Obama steers a compromise tax cut through a divided Congress. The potential size of this stimulus ($900 billion) over the next two years could significantly increase the rate of growth of U.S. output and of jobs. However, uncertainty about whether this stimulus will actually occur and whether it will occur in the form and scale proposed adds yet another dimension of ambiguity to the future of the national economy.
The United States faces two critical challenges: an economic recovery that promises to extend many years into the future and unprecedented and intensifying global competition. If a consensus cannot be reached on addressing these challenges, the Great Uncertainty may be replaced by the Great Malaise. One certainty is that business as usual is not a viable option going forward.
This article is based on The Great Uncertainty, Advance & Rutgers Report, No. 4, December 2010