Job Losses Lessen, but Recovery Remains Far Off

The expected loss of 360,000 jobs in June signals a period of rising output and climbing unemployment, dampening prospects for economic recovery

By Peter Coy and Moira Herbst

Sure, unemployment keeps getting worse. But look at the bright side: The rate of deterioration isn't as bad as it was a few months ago.

That's the latest talking point from economic optimists ahead of the July 2 jobs report. If the report does show that job losses slowed dramatically for the fifth consecutive month, look for stocks to rally.

Time for a reality check. Even though the rate of decline in employment has slowed, most economists say that significant job growth remains a year or more away. Most employers either don't need more workers or can't afford to hire them. Even after business starts to pick up, they will hold off as long as possible before adding to payrolls, economists predict.

As if that's not bad enough for the unemployed, the competition for jobs keeps increasing because population growth adds about 1% to the labor force every year. Factor in that labor productivity has been growing at roughly 2% a year—meaning companies can produce the same output with fewer workers. It takes vigorous economic growth to offset those factors, says Michael Englund, chief economist of Action Economics in Boulder, Colo.

Unemployment Rate Inches Toward 10%

Most likely, then, we are headed for a period in which economic output will rise and yet unemployment will climb right along with it. That would be a large-scale repeat of the so-called "job-loss recovery" that followed the brief recession of 2001.

On July 2, the Labor Dept. will announce labor figures for June. Economists are expecting the department to say that the U.S. lost around 360,000 nonfarm jobs (vs. 345,000 in May) and that the unemployment rate rose to 9.6% (vs. 9.4% in May).

Although the rate of job loss is significantly below that of November through March, when the economy lost an average of 670,000 jobs per month, it's still bad by historical standards. In contrast, the U.S. lost 325,000 jobs in the worst month of the 2001 recession.

Few economists see better times ahead—in the near future. A Blue Chip Economic Indicators' survey of economists released June 10 showed an average forecast of a 9.1% unemployment rate in 2009—and an even worse 9.7% rate in 2010. That closely matches the results of a separate survey of economists conducted by Bloomberg, according to figures as of June 30. More pessimistic than average, IHS Global Insight is looking for the unemployment rate to peak at 10.3% in the second quarter of 2010 and then gradually fall to 8% by 2013.

Payroll unemployment has shrunk 3.9% year-over-year though May. Meanwhile, increases in real pay per worker in the past few months have been negligible. "There's still some ways to go," says Standard & Poor's Senior Economist Beth Ann Bovino.

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