Job market damage remains deep, widespread

John W. Schoen Senior producer • Profile • E-mail

The worst of the job market collapse appears to be over. But with businesses still shedding hundreds of thousands of jobs each month, it will take well into next year or longer before the economy creates enough new jobs to begin bringing the the unemployment rate back to pre-recession levels.

Even though the jobless rate jumped in May to a 26-year high of 9.4 percent, Friday's monthly report was much better than expected. The economy's net loss of 345,000 jobs, below the 500,000-plus forecast and the lowest monthly total since September of last year.

That suggests the worst of the carnage that began with the financial crisis last year has ended, an impression that was confirmed by this week's report that the number of people receiving unemployment benefits fell for the first time in more than four months. These indicators are consistent with evidence that the economy is working its way to recovery after the worst recession since World War II.

But the damage inflicted on the job market has been heavy, and is far from over.

Already some 6 million jobs have been lost since the economy peaked in December 2007, and with employers still shedding jobs the total may reach 9 million before the job market turns around, according to John Silvia, chief economist for Wachovia. That would represent about 6 percent of the work force. The number of long-term unemployed — those out of work for 27 weeks or more — stands at a record 3.9 million, triple the number at the start of the recession.

With employers continuing to shed jobs, the jobless rate is likely to top 10 percent and could remain stubbornly high for some time to come. In recent recoveries, employers have been slow to higher, meaning that the jobless rate can continue to rise even as the economy begins to expand.

“The economy had two horrific quarters in (in late 2008 and early 2009), really the worst back-to-back quarters in 50 years,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “Things are stabilizing, no question. But the fact is you still have job losses. We're still many months away from positive increases.”

The improvement in the job market offers evidence that that the government’s multitrillion- dollar effort to cut taxes, increase public spending and keep interest rates low is helping to stabilize the economy.

"This is exactly what the stimulus is supposed to do," said Mark Zandi, chief economist at Moody's Economy.com. "But here’s the thing: The stimulus starts to fade next year, and the economy may slow. And we may need another round."

That could put government policymakers in a bind. Interest rates already have begun to creep higher due to the sheer volume of government debt and concerns about inflation down the road. But efforts to cut back on federal spending or raise taxes too soon could choke off the economic recovery before it takes hold.

“I suspect that we will continue to need a trillion dollars' worth of deficit financing, fiscal stimulation, for several years at least," said Bill Gross, managing director of Pimco, which runs the world's largest bond fund. "This economy is still de-levering. It is still at the whim, so to speak, of savings vs. consumption. It is deglobalizing. It is reregulating. These are forces that slow growth."

The contraction in employment has cut a wide swath, sparing few sectors or industries, unlike  past downturns. In the private sector, only education and health care have managed to hold the line on employment, adding another 44,000 jobs last month. But Diane Swonk, chief economist at Mesirow Financial, expects those gains to remain weak.

“We have heard of a lot of pink slips going out for teachers and health care starting to get hit by the number of people underinsured and cutting costs at hospitals,” she said

Until recently, government payrolls have also held up relatively well, but that appears to be changing. With state and local budgets squeezed, job cuts have picked up. Falling home prices have cut into local property tax rolls, local sales taxes are drying up and job losses have taken a bite out of state income tax receipts.

The government sector shed 7,000 jobs in May, according to Friday's report.

State and local governments "have to balance their budgets,” said John Challenger, CEO of the outplacement firm Challenger, Gray & Christmas. "They're under tremendous pressure. We're likely to see more during the summer."

And while the pace of job cuts across the economy seems to be easing, the pink slips remain widely spread across most sectors and industries, according to the latest report from ADP, a payroll management company.

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