Today's jobs figures have driven home the severity of the US's employment crisis. The economy essentially created no jobs in August, and unemployment remained painfully high at 9.1%. What's worse, there's little prospect that the government or the Fed will remedy the situation any time soon. As a result, the country faces a period of prolonged high unemployment that threatens to stifle consumer spending and undermine the competitiveness of the workforce.
If the latest data are any indication, efforts to put Americans back to work have a long way to go. Non-farm payrolls registered no increase at all last month. Those fortunate enough to be in work saw their earnings and average weekly hours decline. Just to keep pace with growth in the working-age population, employment needs to increase by 125,000-150,000 a month. So far in 2011 non-farm payroll jobs have increased by an average of 109,000 a month. At that rate it would take over five years just to regain the 6.9m jobs that have been lost since the start of the recession.
Nervousness by companies after the political debacle in Washington at the start of the month no doubt contributed to today's very bad numbers. After the debt-ceiling drama, the downgrade of the US credit rating and the subsequent plunge in the stock market, it is no surprise that companies kept their hiring plans on hold in August. With much of the political drama behind us, we would expect some improvement in the jobs picture next month. But that doesn't change the underlying picture of weakness in the US economy.
The main reason that unemployment remains stubbornly high is a persistent shortage of demand for the goods and services that workers produce. Aggressive cost-cutting means that businesses are making healthy profits and have stockpiles of cash, but they are too cautious to invest this money productively. They know that households are busy rebuilding their finances following the collapse in house prices and have little spare cash to spend. In such an environment, no company wants to risk expansion. But this creates a self-reinforcing cycle of weak demand, anemic wage growth and high unemployment.
Usually, policymakers might be expected to help drag the economy out of its funk. But big moves by the Obama administration or Congress appear unlikely. Budget policy is set to be a drag on the economy in 2012, even if the temporary payroll tax cuts and extended unemployment benefits are not allowed to expire, as scheduled. And after the embarrassing debt-ceiling episode, Americans have little faith Washington's ability to make sensible policy decisions.
More tangible effects of government policy on the labor market can be seen in the payroll figures themselves. Since the recession ended, the government has shed 595,000 jobs. In August it cut a net 17,000 jobs. The decline in public-sector employment has been largely a result of state and local governments being forced, by law, to balance their budgets after a collapse in revenue, but the federal government could have done more to help them out.
Another round of bond buying, known as quantitative easing, would put hundreds of millions of dollar in surplus cash into the economy, no doubt easing the stock market jitters that have made investors, companies and consumers so nervous in the last month. Other options have also been discussed, but the Fed has so far been reluctant to take action and there are doubts about how much impact further monetary policy actions could have on the real economy.
In short, it looks like the economy will be left to heal itself - a process that will be slow and painful. It is still too early to predict another recession, but that is looking like an increasingly likely outcome. Moreover, obsessing over the possibility of a double dip risks downplaying the fact that the economy still hasn't recovered from the last recession - two years after the recession officially ended, economic output is still below its pre-crisis peak and the unemployment crisis is as serious as ever.
One of the greatest dangers facing the economy lies in the potential for permanent damage to the quality of the workforce. Plenty of workers have already given up looking for a job; of those searching for jobs, half had been out of a job for nearly week or more. The longer people are out of work, the harder it becomes for them to find a job, either because they lose skills or they develop a stigma in the eyes of employers. As workers become unemployable and drop out of the workforce, cyclical unemployment becomes a structural problem, leaving the economy and society permanently scarred. The Economist Intelligence Unit expects economic growth to average around 1.5% in real terms over the next two years. At that rate there will be little progress in reducing unemployment. The long-term scars left behind will be deep.