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A Jobless Recovery and Strong Stock Market

Prof. Peter Morici - 7/27/2009

The economy is bottoming and a modest recovery will begin this fall. The stock market will soar but high unemployment will stain Barack Obama’s presidency.

New unemployment claims are falling, and monthly job losses will taper off soon. Then consumers will spend with new vigor.

Households are cautious and saving more, but increasing savings from zero to five or ten percent of income is a one time adjustment. Once accomplished, consumers will spend, but GDP will grow a mediocre 2.5 percent annually through 2011, and America will record the Great Jobless Recovery.

Unemployment will remain stubbornly high, because President Obama’s policies don’t fix what’s broke.

During the recession, more than 7 million private sector jobs will be lost, even as local governments added teachers and bureaucrats and boosted taxes.

New taxes on CO2 emissions and an 8 percent levy to fund health care scare many businesses about their prospects in President Obama’s green economy.

Half the private sector jobs were lost in construction and manufacturing.

Yet President Obama’s stimulus spending focuses most on aiding local governments and expanding federal agencies, like the Department of Education. With only one-seventh of the stimulus dollars going into infrastructure, the recovery in construction will not be robust.

Manufacturing shed 2 million jobs during the recession and 5.4 million in this decade—half to subsidized imports from China and other foreign competitors—and those will not be replaced by new exports.

China is increasing export subsidies to boost employment but that destroys more U.S. manufacturing jobs. President Obama is afraid to challenge Chinese mercantilism, and paints as protectionist any suggestion the United States meaningfully respond.

Construction and manufacturing provide some of the best paying jobs for workers without college diplomas. Yet, President Obama has no coherent plan to bolster those sectors.

Hence, jobs growth will be slow and more heavily concentrated in lower paying occupations, with obvious consequences for GDP growth.

The outlook for stocks remains strong.

U.S. companies have streamlined operations and lowered breakeven points. Even with domestic sales growing only moderately, many businesses can enjoy strong profits and drive stock prices higher.

China’s stimulus package was better conceived and executed than President Obama’s, and U.S. firms are poised to profit through increased production in their Chinese-based factories. This may not much boost U.S. growth but it will lift stocks like Caterpillar and IBM.

Stocks fell twice during the Great Recession. The S&P decreased from 1498 in December 2007 to 1003 in October 2008. With the panic about the banks, stocks collapsed in November and reached a trough at 683 in March 2009. Treasury and Federal Reserve policies restored confidence in the financial system, and by June 1, the S&P index rose to 945, approximately its mid July level.

By yearend, the S&P should pierce 1130, and Dow Jones should reach 10,500. Stocks should reach prerecession peaks as the economic expansion continues.

Overall stocks will do well but unemployment will stay stubbornly high. Strong wage gains for ordinary workers will be the stuff of history books.