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Thu, May 08, 2003 - Page 12 News List

Jobless recovery defies quick fix

POLICY CONUNDRUM With federal interest rates remaining unchanged at 1.25 percent, analysts fret about policymakers' ability to influence job growth


US President George W. Bush gestures during a speech to a lobby group at the US Chamber of Commerce building in Washington. The president encouraged the group, the Tax Cut Coalition, which came to Washington to apply pressure to members of Congress who want to see a much smaller tax-cut than the US$726 billion he has proposed.


The so-called "jobless recovery" is proving to be a conundrum for US Federal Reserve policymakers, who have little ammunition to help strengthen an ailing economy that needs job growth to stay on track, analysts say.

The Federal Open Market Committee on Tuesday left its key federal funds rate unchanged at a four-decade low of 1.25 percent, while saying that "weakness" is the biggest risk to the economy going forward.

While some indicators are showing signs of a modest pickup in economic activity, the labor market has been particularly hard hit.

In the past three months, the US economy has shed 525,000 jobs as the unemployment rate has risen to 6 percent.

Many analysts say the economy needs to grow at a pace of at least three percent to spur job creation, much faster than the 1.6 percent rate of the first quarter.

More importantly, the loss of jobs can turn into a vicious circle by cutting into consumer spending and confidence, which in turn can keep businesses cautious about expanding to meet demand.

"It's the revenge of the new economy," said John Silvia at Wachovia Securities, who points out that improved productivity and other factors leads to a need for fewer workers.

"We're especially concerned that the jobless nature of the current recovery is its weakest link," said a research note by Morgan Stanley analysts Richard Berner and David Greenlaw.

"This jobless recovery isn't sustainable, in our view, for two reasons. Were it to continue much longer, consumers fearful of job loss likely would grow increasingly cautious ... And without self-sustaining recovery that began to promote growth in investment that at least maintained the economy's productive potential, the productivity gains that are the silver lining in this dark employment cloud would ultimately wither," they said.

For the Fed, the ability to stimulate business activity is limited with base interest rates at a four-decade low.

"I think monetary policy has become somewhat impotent at the moment," said Sung Won Sohn, chief economist at Wells Fargo Bank in Minneapolis, Minnesota.

Sohn said a more effective stimulus could come from the fiscal side, by a cut in taxes; but he noted that US President George W. Bush's economic proposal would have little or no effect on the economy until next year.

Still, Sohn was optimistic about a gradual improvement that pulls up all sectors of the economy, including the labor market, later this year.

"We have been in a jobless recovery and I don't expect a surge in employment," he said.

"But I hope we'll see a stabilization ... all the indications are looking better; the stock market is pointing in that direction, the price of oil is down, and we'll probably get another round of tax cuts in Washington," he said.

Sohn said the Labor Department's recent monthly report, which showed a drop of 48,000 jobs, contained hopeful signs: "The loss of jobs was prewar and not postwar, and the bulk of the losses came from manufacturing."

Sohn also noted that the agency's separate household survey showed modest job gains, and that the rise in the unemployment rate was a result of an expanding workforce.

Still, some analysts remain concerned about the job market dragging the economy down.

A survey by outplacement firm Challenger, Gray and Christmas showed US firms announced 146,399 job cuts in April, up 71 percent from March.

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