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'A Recovery Only a Statistician Can Love'
Data That Point to Improving Economy Also Suggest Continued Pain for Many

By Annys Shin
Washington Post Staff Writer
Wednesday, August 12, 2009

The pile of economic data indicating that the worst of the recession is over just keeps growing. In the past few weeks, the government has reported that businesses last month shed the smallest number of jobs in nearly a year. The savings rate, after rising rapidly, held steady at levels not seen in at least five years. And from April to June, productivity surged to a six-year high.

But the same data also explain why any recovery isn't going to feel like one anytime soon for millions of Americans. Its existence will be confirmed by statistics, but, over at least the next year, the benefits are unlikely to materialize in the form of higher wages or tax receipts or more jobs.

"It's going to be a recovery only a statistician can love," Wells Fargo senior economist Mark Vitner said.

A few recent pieces of data offered reasons for both hope and trepidation.

The Labor Department reported Tuesday that business productivity jumped in the second quarter to a seasonally adjusted annual rate of 6.3 percent, far higher than the annual average of 2.6 percent from 2000 to 2008.

Higher productivity helps raise living standards in the long run and is good for corporate profits because it allows companies to produce more without paying higher labor costs. But the boost in productivity was largely due to businesses slashing hours faster than output. Labor costs per unit fell, but so did the buying power of workers, further constraining already weak consumer spending, which accounts for 70 percent of the economy.

Increased productivity, combined with other factors, could also bode poorly for employment because as long as businesses can do more with fewer people, they can delay hiring. Adding to that potential delay is the fact that employers have slashed hours to an unprecedented degree to survive the recession. The average time spent working each week is at a record low, and just under 9 million people are working part time for economic reasons.

"Before you see hiring, firms have an awful lot of latitude to increase hours," said Richard Moody, chief economist for Forward Capital, an investment research firm.

As a result, many economists said, a jump in productivity increases the odds that the recession will be followed by a "jobless recovery," similar to what followed the 2001 recession. That downturn had similar productivity gains.

Once it was officially over, it took 55 months before a greater share of Americans had jobs than when the recession ended, compared with 29 months after the 1990-91 recession and just seven months after the 1981-82 recession, according to an analysis of government data by University of California economist Brad DeLong.

Another piece of encouraging news -- the July jobs report -- showed the unemployment rate edging down to 9.4 percent from 9.5 percent as the pace of layoffs slowed. But the rate also fell largely because more than 400,000 people dropped out of the labor force and therefore were not counted as unemployed.

Another disturbing development was that the number of people out of work for 27 weeks or longer reached a record 5 million, accounting for a third of the unemployed. That suggests to some economists that those job losses were caused by structural changes in the economy and that many of those people won't be called back to work once the economy picks up. The longer people are out of work, the harder it becomes for them to find jobs and the more likely they are to exhaust savings or lose their homes to foreclosure.

"Economists are using one concept of recession that is at total variance of how a normal human being thinks of it. A normal human being thinks of a recession as: You fell into a hole, and as long as you're in a hole, you're in a recession," said Lawrence Mishel, president of the Economic Policy Institute. "Economists think of [a recession's end] as . . . when the economy stops shrinking."

Job loss or simply the prospect of it has motivated Americans to save more after years of spending beyond their means, a development hailed by civic leaders, personal finance gurus and some economists as vital to more sustainable economic growth in the long term. But in the short term, it is bad for the economy because it is yet another constraint on consumer spending. Weak spending is one of the major reasons economists cite in their forecasts for a sluggish recovery.

With fewer people and businesses willing to buy things, it will take longer for the economy to work off all the excess capacity that was built up during boom times.

Think of thousands of idled factories, acres of empty strip malls and ports packed with unsold automobiles, not to mention millions of workers who lost jobs as business scaled back production to keep up with falling demand.

"We have excess capacity and high unemployment across the board," Mishel said. "What we need is customers."

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