The economy failed to add jobs for the first time in nearly a year, dealing the U.S. economy another body blow, as most economists and even White House budget experts have grown less optimistic about the prospects for a swift economic turnaround in the second half of 2011.
Nonfarm payrolls remained flat in August with the unemployment rate holding at 9.1 percent, the Labor Department said Friday, some of the worst jobs data in months. Private-sector gains amounted to only 17,000, not nearly enough to offset continued job losses in the public sector and a far cry from the number of jobs the economy needs to add monthly—about 350,000 to 400,000 jobs over the next three years, experts say—to make a dent in the soaring unemployment rate. In a report Thursday, the White House Office of Management and Budget said it expects the jobless rate to remain around 9.1 percent for the remainder of 2011, with unemployment not expected to dip below 6 percent until 2017.
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According to the Obama administration, the economy remains the top priority heading into fall, most importantly the high unemployment rate, which has been draining the life out of the U.S. economy for the past few years.
Many proposals aimed at jumpstarting job growth have been batted around, including extending unemployment benefits, prolonging the payroll tax holiday, instituting a tax credit for businesses that hire, and infrastructure spending. But what neither economists nor politicians can say for sure is how these initiatives will impact small businesses, the key piece missing in the hiring puzzle, according to some experts.
Small businesses have historically fueled the vast majority of job creation, generating nearly 65 percent of net new private-sector jobs over the past decade and 98 percent of the nearly two million private-sector jobs created since January 2010, according to ADP data released Wednesday.
But overall hiring in this recovery has lagged recoveries in the past. Why aren't small businesses hiring?
Experts say it comes down to low consumer demand—a downstream problem that's hard to fix in a time of unparalleled economic and political upheaval. It's also why some critics say the Obama administration's job creation plans may end up doing little to cure the malaise plaguing the job market.
"Because none of these ideas address the main impediment to hiring—persistently insufficient final demand—our expectations for the success of the jobs bill are, well, not so great," an August 24 Macroeconomics Advisers report said of the impending jobs proposal by President Obama, scheduled to be released September 8.
Consumer sentiment has taken a beating over the past few months as partisan bickering in Washington, a high-profile downgrade of U.S. debt, and natural disasters have undermined confidence and induced fear. "It's almost a stare-down between consumers and the economy," says Philip Noftsinger, president of CBIZ Payroll. "There's a lot more saving going on, there's a lot of debt reduction going on, which given our overall debt load as individuals is not a terrible thing, but it does restrict economic growth in terms of consumer demand and consumer spending. That represents the vast majority of our economy."
It's a vicious cycle: Consumer demand won't pick up until hiring and wages get a lift, but hiring and wages won't pick up without consumer demand.
Low consumer demand isn't the only thing hindering hiring decisions. New government regulations, including healthcare reform and financial regulatory reform act Dodd-Frank, might be causing smaller firms to hold back on hiring, too. "The biggest cost of most small business is their labor costs," says T. Doug Dale, Jr., client adviser at Security Ballew Wealth Management. "If you think about that and then on top of that the fact that we have a healthcare mandate, those are two big things that are keeping employers hesitant and running as lean as they possibly can."
The persistent hangover from the housing bubble is another drag on the economy. "Much of the consumer spending growth we had coming out of the 2002 recession was the result of the appreciation of housing values that allowed people to extract equity from their homes, giving them more disposable personal income," Dale says. While the latest Case-Shiller Home Price Indices showed slightly increasing prices over the past three months, the unfortunate hallmark of this recovery has been consistently faltering housing prices, a trend experts expect to continue through the first half of next year.
"We have to start looking at consumer spending net of any appreciation in the housing market, which we don't expect to happen for several years," Dale says. That picture doesn't look too rosy. According to Dale, expectations for consumer income growth—a key factor in predicting consumer spending—will likely barely keep up with the cost of living, especially with rising food and energy costs.
Although tentative proposals by the Obama administration haven't been met with great enthusiasm, experts say there's still an important role for the government to fill as the economy claws its way out of one of the deepest, most persistent recessions in U.S. history.
"I think it's important for government to continue to play a part in stimulating the economy in a reasonable way," Noftsinger says. "[The federal government] should continue to support and provide an environment where growth can occur."
More infrastructure spending has been a popular pitch, a move supporters say would not only put Americans back to work but modernize the country's aging energy grid, roads, bridges, and rail systems. "There is clearly some multiplier effect on the economy that can come from some stimulus spending in the area of infrastructure," Dale says. "Look at what we spend on unemployment benefits, for example. There's obviously a greater benefit to paying somebody to go to work than paying someone to stay home."
But there are limits to government's impact on the situation, Noftsinger cautions. "Regardless of how many trillions of dollars we spend, the government doesn't have the capability or financial wherewithal to push the economy back into growth by itself," he says. "That's going to be a function of macroeconomics and consumer demand. But that said, it's a responsible approach by the government to create an environment where growth can occur by doing things like creating incentives for hiring."
Perhaps more damaging to the U.S. economy than low consumer demand, Americans' confidence in the economy and faith in government has steadily deteriorated over the past several months as the Obama administration has fended off forecasts of a double-dip recession. Most experts agree that apart from a credible plan to get the economy back on track, Americans need reassurance to boost morale and reinvigorate economic activity.
"What we really need is consistent, positive news regardless of how big the number changes," Noftsinger says. "We just need positive news to really start to lift us out of that malaise."