The no-jobs economy: Why isn't the US recovery stronger?

Failure to reach at least a modest debt deal could signal to investors that the US government is in a state of chaos and uncertainty. That could make the nation's jobs problem still worse.

By , Staff writer

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    People looking for jobs at an unemployment office in downtown Los Angeles. US unemployment edged up to 9.2 percent in June. Failure to reach at least a modest debt deal could signal to investors that the US government is in a state of chaos and uncertainty. That could make the nation's jobs problem still worse.
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The US economy generated only 18,000 new jobs in June, so few that the Labor Department on Friday described the nation's job count as "essentially unchanged."

Why is the job market so weak? Is the economy at risk of a new recession?

Those questions loom large as President Obama and congressional leaders seek a deal to raise the limit on federal debt, while also restraining future deficits. Their stated goal is to put the government's own finances on sounder footing, but that issue is inextricably linked to the larger economy.

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US job market: Four ways to cut the unemployment rate

"The economy has to support the government," says Peter Schiff, who heads the investment firm Euro Pacific Capital in Westport, Conn. "If consumers are broke ... then government is broke."

At present, consumers aren't quite broke, but they certainly aren't feeling flush with cash either.

A few days ago, Discover Financial Services announced that its "spending monitor" survey for June showed a significant slide in consumer confidence. Nearly 56 percent of adults said the economy is getting worse, up from about 51 percent in May and 40 percent in January.

The survey also found a majority saying their own personal finances are worsening, although only 17 percent said they expect to reduce their spending in July.

The consensus view among professional forecasters is that the economy will pick up some speed in the second half of the year and avoid a recession. But some believe a recession is very possible, even probable, by next year.

"The problem with a slow-growth economy that is basically at stall speed is, if there is any type of ... shock, the economy can easily tip over into recession," investment adviser John Mauldin, president of Millennium Wave Advisors, wrote in a recent newsletter.

One worry, for example, is that a cooling in the European economy, linked to the burden of a public-debt crisis in nations like Greece, could have negative ripple effects worldwide.

For the US, the patch of economic weakness comes two years after a deep recession officially ended, leaving unemployment today at 9.2 percent of the work force.

The challenge involves a mix of forces.

Temporary factors include the Japanese earthquake and tsunami, which interrupted global supply chains for some important industries including autos.

Soaring gasoline prices have eaten into millions of bank accounts. And although pump prices have been edging down in recent weeks, they remain high.

Perhaps the biggest longer term factor is the burden of high debt levels among consumers. After the decline in home values since the recession, many households still have historically high levels of debt, but no longer have the home equity that once went with it.

Historically, recoveries after a debt-related financial crisis tend to be significantly slower than the rebound from a more typical recession.

The government has made big efforts in the past two years to coax the economy forward through stimulus efforts. But that has helped push public-sector debt toward dangerous levels. So far, the government debt itself hasn't dragged the economy down, but it also hasn't resolved the economy's problems.

All this is an important backdrop for the talks Obama is holding with leaders of Congress. Although some economists say more federal stimulus would help job growth and is warranted, the political winds are blowing the other way.

Republicans who control the House of Representatives are calling for big cuts in federal spending, to curb the size of government and create a better climate for job creation in the private sector.

Some prominent economists agree with that prescription, arguing that adding more federal debt at this point won't do much for job creation.

House Speaker John Boehner (R) said Saturday that it was unlikely the two sides could agree on an expansive $4 trillion package of deficit reduction, because Democrats and Republicans are at odds over taxes. (Democrats say some boost in tax revenue is vital alongside spending cuts for a "balanced" deficit plan, while Republicans stand firm against tax hikes.)

Failure to reach at least a modest debt deal – say in the range of $2 trillion in deficit reduction – could make the nation's jobs problem still worse.

That's because it could signal to investors that the US government is in a state of chaos and uncertainty. If the borrowing limit isn't raised soon, a partial default on Treasury debts or other federal obligations is possible.

Bottom line: Reaching a debt deal is important, but so are other steps to revive job creation.

The goal isn't easy to achieve, while many households are struggling to dig out from too much debt. But various groups, from think tank economists to the US Chamber of Commerce, are coming out with ideas on what would help.

US job market: Four ways to cut the unemployment rate

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