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The Coming Jobless Recovery

Now we are getting the clearest indication yet that we are headed for a jobless recovery.

A total of 467,000 jobs were eliminated in June, bringing the jobless rate to 9.5 percent from 9.4 percent in May, according to the Labor Department. The jobless rate was the highest since August 1983. Economists had expected employment to fall by only 365,000, according to a survey by Bloomberg, so June's figures were something of a shock. In addition, average weekly earnings declined from $613.34 in May to $611.49.

Manufacturing lost 136,000 jobs during the month -- a large percentage no doubt in the automobile industry -- construction jobs fell by 79,000 and employment in the professional and business services sector fell by 118,000 in June. Even the federal government lost jobs, and that's with a $1.2 trillion deficit! This means since the start of the recession in December 2007, the economy has lost 7.2 million jobs, more than the number of jobs created since the last recession in 2000.
Millam Mulraine, an economist at TD Securities, said the numbers offer a bleak prospect for the country's economic future. "On the whole, this was a very ugly labor report, and there is no amount of lipstick that can improve its image," Mulraine wrote in a note to investors. "Indeed, not only does it suggest that the pace of job losses in the U.S. remains very high, it bucks the trend of four consecutive months of improvements in the pace of job losses."

It's only a matter of time now before the unemployment rate breaks through the psychologically important 10 percent level. In fact if you dig deeper in the Labor Department's numbers, it's already there. According to one measure, "total unemployed plus discouraged workers, plus all other marginally attached workers," the number was 10.8 percent in June, up from 10.6 percent in May.

Both the 1991 and 2000 recessions were followed by jobless recoveries, meaning that the GDP growth resumed after declining in a recession, but the unemployment numbers remained high long after the recession ended.

Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, said in a speech this week that she expected a similar outcome in the current downturn. "I expect we will turn the growth corner sometime later this year, but I am not optimistic that the economy will spring back to normal anytime soon," Yellen said. "What's more, I expect the unemployment rate to remain painfully high for several more years."

Remember that unemployment numbers are a lagging indicator, which means that they usually don't improve until after a recession is finished. We know from several other statistical releases this week that the recovery seems to be making progress.

According to the Commerce Department, new orders for manufactured goods increased by $4.1 billion in May to $347.9 billion, a rise of 1.2 percent. Durable goods orders such as refrigerators and washing machines were up 1.8 percent.

Another measure of U.S. manufacturing, the Institute for Supply Management's factory index, rose two points to 44.8, the highest level since last August. While a number below 50 means a contraction, June's number indicated that manufacturing shrank at the slowest rate in 10 months.

And there were even some positive indicators on the housing front, the most troubled sector in the American economy. The pending home sales index, which is based on contracts signed in May, rose 0.1 percent, the fourth consecutive monthly increase, according to the National Association of Realtors. That's 6.7 percent higher than May 2008. The NAR said buyers are becoming more active "even as they face much more stringent loan underwriting standards."

The net result is the economy will continue to improve very slowly in the second half of the year, but unemployment could be stubbornly high well through 2010. That could have a serious impact on consumer spending, which accounts for two thirds of the U.S. economy, And that's why the recovery will be achingly slow.