By Michael A. Fletcher
Washington Post Staff Writer
Monday, June 22, 2009
Despite signs that the recession gripping the nation's economy may be easing, the unemployment rate is projected to continue rising for another year before topping out in double digits, a prospect that threatens to slow growth, increase poverty and further complicate the Obama administration's message of optimism about the economic outlook.
The likelihood of severe unemployment extending into the 2010 midterm elections and beyond poses a significant political hurdle to President Obama and congressional Democrats, who are already under fire for what critics label profligate spending. Continuing high unemployment rates would undercut the fundamental argument behind much of that spending: the promise that it will create new jobs and improve the prospects of working Americans, which Obama has called the ultimate measure of a healthy economy.
"Our hope would be to actually create some jobs this year," Obama said in an interview with The Washington Post in the days before taking office.
Obama has defended his economic approach -- which includes the $787 billion economic stimulus plan and record investments in health care, alternative energy, education and job training -- as necessary to stabilize the shaky economy and point the way to job growth.
So far, the White House has counseled patience even as the political debate surrounding its economic policies grows more urgent. Officials point out that job growth will not come until robust economic expansion takes hold, which they expect will happen as stimulus funding works its way through the economy. Still, the flagging job market is likely to stir calls for further stimulus efforts as polls show voters growing increasingly wary of federal spending in the wake of a costly series of financial- and auto-industry bailouts and amid current efforts to expand health-care coverage to the uninsured, which is estimated to cost at least $1 trillion over the next decade.
With many forecasters projecting unemployment to remain above 10 percent next year and not return to pre-recession levels of roughly 5 percent for years after that, Obama is likely to be confronted with defending the effectiveness of his economic policies as the nation endures its worst employment situation in a generation.
Analysts say the high levels of joblessness would be accompanied by increases in child poverty, strained government budgets, and black and Latino unemployment rates approaching 20 percent.
"I find it unfathomable that people are not horrified about what is going to happen," said Lawrence Mishel, president of the Economic Policy Institute. "I regard all this talk about how the recession is maybe going to end, all the talk about deficits and inflation, to be the equivalent of telling Americans, 'You are just going to have to tough it out.' But we're looking at persistent unemployment that is going to be extraordinarily damaging to many communities. There is a ton of pain in the pipeline."
Christina Romer, chairman of the Council of Economic Advisers, said that while the president is "very concerned" about the unemployment forecasts, the White House has assumed "a posture of watchful waiting," adding: "There will be big increases in stimulus spending in the fall and early next year. We have to wait to see what happens with that. If you get to the end of this year or early next year and employment is still limping back, then we have to do some serious thinking about whether there might be special problems in the labor market that require targeted interventions."
Before passage of the stimulus bill, the Obama administration had predicted that unemployment would peak at 8 percent before beginning to abate this fall. But unemployment has already reached 9.4 percent, the highest level in a quarter-century, and the situation is not projected to start improving until long after the White House had predicted.
Many economists agree that the job market would be in much worse shape had the stimulus package not been enacted. And some say more stimulus measures may be needed, even as the federal government grapples with a huge budget deficit.
"There is a good economic argument to be made that the government has not done enough stimulus," said Niko Karvounis, a policy analyst at the New America Foundation who recently wrote a report warning that the economic recovery is likely to be tepid and accompanied by unusually high unemployment.
But with polls showing increasing public opposition to government spending and with no significant constituency mobilized to push for more government investment in jobs, the political prospects for any further stimulus legislation seem slim. Meanwhile, the continued rise in unemployment is creating an opening for Republican critics, who have criticized the level of spending Obama has pursued to try to fix the economy.
"They even predicted that if we passed it quickly, unemployment wouldn't go higher than 8 percent. Well, here we are just a few months later and the unemployment rate is approaching 10 percent," said Senate Minority Leader Mitch McConnell (R-Ky.). "The administration admits that their earlier predictions were a guess -- and that they guessed wrong."
Obama tersely acknowledged in an interview with Bloomberg Television last week that unemployment is likely to peak above 10 percent. That prediction is in line with a growing number of respected economic forecasts, including those of private economists and the Congressional Budget Office, which projects that the unemployment rate will continue to rise into the second half of next year.
"Unemployment won't peak until this time next year, and then it will remain very high through next year," said Mark Zandi, chief economist for Moody's Economy.com. "It won't get back to full employment until 2013 or 2014. This really speaks to the severity of the job losses that have been absorbed by the economy. They were massive."
Since the recession took hold in December 2007, the U.S. economy has lost 5.7 million jobs, a rapid decline that caught administration and other economists off guard. In recent months, the velocity of job losses has slowed substantially, which, combined with a rising stock market and increases in consumer spending, has offered hope that a recovery is beginning to take hold.
But employers still cut 345,000 jobs last month, while the nation's growing working-age population requires the job market to expand by 125,000 to 150,000 a month just to keep the unemployment rate stable.
The dynamics of the modern economy further dim the employment picture. Job growth was weak for years after the past two recessions, in 1991 and 2001. Employers have grown increasingly slow to rehire workers, and steady advances in technology have allowed businesses to do more with fewer workers.
While the recession has touched workers across the spectrum, "many of the job losses are in manufacturing and construction, affecting less-educated workers and immigrants," Zandi said. "It is going to be hard for them to find their way back into the workforce quickly."
Meanwhile, the current recession has been characterized by the implosion of the housing market and the near collapse of the financial sector and automobile industry. Despite huge federal interventions, many of the jobs in those industries are gone for good.
High unemployment also does not bode well for consumer spending, which accounts for about 70 percent of the nation's economic activity, putting further pressure on the job market.
"We have not seen the highest unemployment rate, and this is going to go on for a long time," Mishel said. "The political conversation seems to be that we have already dealt with the recession. But we need to have a conversation about how we are going to get to the other side, where employment is growing again."
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