The Summer of Stagnation

Vice President Biden predicts that this, at long last, will be “the summer of recovery.” The stimulus bill is working, he said, and “more people are going to be put to work this summer.” But that’s not the way things are shaping up.

The latest jobs report shows that the economy shed 125,000 jobs in June. That’s more than in any month since October. Some of that was expected. The end of the census meant the disappearance of 225,000 temporary government jobs. But the crucial indicator of whether the economy is likely to add more jobs is the number of private-sector jobs created. While it's good news that private-sector payrolls have increased for six months straight, June's 83,000 new private-sector jobs aren’t enough to keep up with the more than 100,000 new workers who enter the labor force each month. And they’re just a small fraction of the 7.4 million jobs that have disappeared since the start of the recession.

The fact that the nominal unemployment rate actually fell slightly to 9.5% is misleading. That decline is due to the fact that people who have stopped looking for work—even if they have simply given up—aren’t counted. The broader measure of those who would like work but can’t find it stayed steady at around 16.5%, and the underlying labor force participation rate slipped 0.3%. At the same time, the mean length of time people have been looking for jobs jumped to a record—and incredible—35.5 weeks.

With so many Americans looking for work—and now that the federal tax credit for home buyers has expired—the housing market is starting weaken again. Home sales are down 30%, in spite of record-low mortgage rates and depressed real estate prices. “It sounds simplistic but it bears repeating: 'No job = No house,'" Mike Larson, an analyst with Weiss Research, told his clients this week. "With so many Americans unemployed or underemployed, the housing market is going to keep hurting.”

This all suggests that the recovery has begun to stall as stimulus money has begun to run out. Although the White House is touting a host of stimulus projects taking place over the summer—huge increases in highway and clean water projects, the restoration of national parks, efforts to weatherize homes, and a substantial effort to increase broadband access in poor and rural areas—federal stimulus programs are coming to an end. And even as the federal government continues to try to stimulate the economy, state governments are drastically cutting spending. Developed countries around the world are doing the same thing, hoping to avoid debt crises like the one Greece recently faced.

Pressure is mounting in the U.S. to rein in spending too. But the U.S. is not Greece. Our economy is larger and less vulnerable to fluctuations in international trade, and our debt load is still more manageable. Concern over the long-term consequences of deficit spending is understandable. There is a real question whether we will ever have the political will to make the deep cuts we will have to get our finances in order. Nevertheless, the evidence is mounting that now is not the time to tighten our belts. Temporary stimulus spending has a relatively small effect on long-term deficits. But investing in bringing our economy back up to capacity could actually reduce long-term deficits by increasing government revenues. It was, as David Leonhardt reminds us, a disaster when we tried to rein in deficit spending in the 1930s before the economy had recovered. As it is, it looks like we’re in for another difficult economic summer.

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