The facts clearly indicate that the Great Recession was a global crisis, and the United States, traditionally the engine driving recovery, has seen every cylinder misfire. The U.S. government's response was to provide massive fiscal support, transferring wealth to the household sector. However, if these transfers are excluded, personal income for Americans is still declining; the housing market remains stagnant (at best); and consumption growth is pitifully low. The only real driver of the U.S. economy has come from the cessation of the inventory liquidation process. Today, it is the primary factor driving industrial output growth and a modest economic recovery.
American household sentiment is depressed. In May, only 11.3% of Americans believed their income would rise in the next six months, while 16.6% believed it would fall. The latter group outnumbered the former for the first time in over 40 years. Given the growing concerns over the surging fiscal deficit, any large-scale fiscal and monetary stimulus capable of reversing this downward trend is likely politically unsustainable.
Wherever you look, the situation is equally grim. Leading economic indicators fell in April—a decline that is unusual at such an early stage of an economic upturn. Initial jobless claims rose by 25,000 to 471,000. In the first three weeks of May, this indicator exceeded expectations again, with its four-week moving average rising to a level equivalent to a net loss of 100,000 (or more) jobs. Over the past few months, this indicator has been far from the 400,000 (or fewer) level. In the past, this level indicated that the U.S. economy was consistently creating jobs.
We are not currently in a normal economic recovery cycle. If we were, employment numbers would have already hit new highs, and job losses would have been fully recovered, as seen in many post-war recessions. This time, however, employment remains a staggering 8.4 million below its previous peak. One in six Americans is either unemployed or underemployed. Compared to a typical recession (where job losses do not exceed 2-3 million), this is not a normal cycle.
Research by David Rosenberg, Chief Economist at Gluskin Sheff, shows that the unemployment statistics behind the headline numbers are alarming. More than 6.5 million Americans have been unemployed for 27 weeks or longer (accounting for over 45% of total unemployment), compared to 3.2 million last year.
Wages are falling; as employers continue to control costs and remain reluctant to hire, the trend of wage cuts is spreading. Labor surplus also continues to grow. For example, while non-farm payrolls increased by a significant 290,000 in April, the total labor force surged by 805,000. In reality, there are far more job seekers than jobs being created by the U.S. economy. The broader measure of unemployment, which includes the underemployed and those who have looked for work in the past year, accounts for approximately 17% of the labor force. The headline unemployment rate has ticked back up to just under 10%, but this figure only covers those who have looked for work in the past four weeks.
What is the result of having too many job seekers (on average, 5.6 people competing for one job)? The answer is wage deflation. Since late last year and early this year, average hourly wages have not risen at all, and in one month, they even saw a 0.1% decline—a situation not seen since April 2003.
This is a troubling "jobless recovery." In the fourth quarter of last year, U.S. GDP grew by about 6%, a figure that could be described as somewhat strong. We would typically expect 250,000 new jobs to be added each month thereafter. However, the average number of new jobs added in January and February was only 31,000—it is unprecedented to have such meager job growth after such strong quarterly GDP growth.
Policies must be formulated and government support arranged to help the long-term unemployed. The longer these individuals remain without steady work, the harder it becomes for them to be hired. The number of long-term unemployed has risen from 2 million in June 2004 to 6.7 million in April 2010. The U.S. economy may experience moderate growth for the next five to eight years. To restore full employment and provide jobs for both the unemployed and new labor force entrants, 12 million jobs need to be created. With job losses not yet over, this seems like an impossible task.