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Job Losses Could Drown Stimulus
"Up until the third quarter, we thought we were on track for a relatively moderate recession, but then in the fourth quarter, everything fell apart," said David Wyss, chief economist at Standard & Poor's.
The Obama administration's budget, released in late February, assumes that the jobless rate will average 8.1 percent this year. That now appears unlikely, which in turn could make officials rethink their approach to the crisis.
Regulators, for instance, are conducting "stress tests" of major banks so that the Treasury Department can better determine what kind of financial support they might need. Those tests assume that, in a particularly bleak scenario, the unemployment rate will average 8.9 percent this year and 10.3 percent next year. But if the government projections on unemployment turn out to be too rosy, officials could underestimate the trouble banks are in. A higher unemployment rate means greater losses for banks because more people default on their loans.
The worsening employment picture, meanwhile, could also create a hole too big for the stimulus package to fill.
As a result, government needs to step up and do more, said Heather Boushey, senior economist with the liberal Center for American Progress.
"It's not going to be enough, folks. I hate to break it to you," she said.
Analysts generally expect stimulus spending to have a noticeable impact on the economy during the second half of this year. The money will continue to spur large-scale economic activity through the end of next year, with lesser impact in 2011 and beyond. But for many Americans, the need is urgent now.
That's particularly true for homeowners, more and more of whom are facing the threat of foreclosure. Rising unemployment will exacerbate their problems and could undermine the effectiveness of the Obama administration's plan to make mortgages more affordable.
"Last year, the role of unemployment was a factor in foreclosures, but it is undoubtedly more important now," said Paul Willen, an economist at the Federal Reserve Bank of Boston. "If you have no income, it's hard to pay any mortgage at all."
Andrew Tilton, a senior economist at Goldman Sachs, offered some reasons for optimism. The stimulus money has already started to flow, after all, and a joint Treasury-Fed program to prop up lending launched this week. "For the first time in a while, at least, it's possible to at least see how things could turn out better," Tilton said.