July jobs report renews concerns over a stalled recovery

By Michael A. Fletcher
Washington Post Staff Writer
Saturday, August 7, 2010

The nation's economic recovery continued to sputter in July as employers kept shedding jobs and 181,000 discouraged workers dropped out of the labor force, according to a government report released Friday.

The nation's unemployment rate remained at 9.5 percent for the month, the Labor Department said, as private employers added a modest 71,000 jobs. But that increase was overwhelmed by the loss of 202,000 government jobs, including 143,000 temporary census positions.

In all, employers cut 131,000 jobs, adding to mounting concern among policymakers and analysts that the recovery needs to pick up momentum or risk stalling.

"The road ahead is uncertain, but what is crystal clear is that if we don't see significant job growth by the end of the year, the economy could be in serious trouble," said Bill Cheney, chief economist for John Hancock Financial.

The grim jobs report, and a Goldman Sachs downgrade of estimated 2011 economic growth also issued Friday morning, hammered stocks in early trading, sending the Dow Jones industrial average on a triple-digit plunge. An afternoon rally pulled stocks back up to nearly even on the day.

The jobs report added fuel to the economic debate leading into congressional elections this fall. It also raised questions about what else government can do to stoke hiring.

Although many large firms have returned to profitability since the worst of the downturn, they have not seen the need to add significant numbers of employees. Many firms are getting by with their current workforces; they do not foresee a big uptick in demand as consumers cut back and try to rebuild their wealth, which was significantly diminished by the recession. Meanwhile, new engines of economic growth have yet to emerge.

At the same time, consumer spending, about 70 percent of U.S. gross domestic product, is tepid. Government data released Friday showed that consumer credit dropped for the fifth straight month in June, with Americans choosing to save their income or use it to pay down debt.

"We used stimulus in order to stop a slide toward depression, and it was successful in doing that. But it wasn't enough to create strong growth," said Robert J. Shapiro, chairman of Sonecon, an economic consultancy.

He added: "The problem we face now is a hard one, because not only do we have all the things that are holding down the demand coming out of the financial crisis, in addition in the last expansion business was creating jobs at much lower rates than it did in the 1980s and 1990s. The question is: What can government do now, given that?"

Members of the Federal Reserve's policymaking committee have expressed reluctance to taking new steps to encourage growth, given that the Fed's interest rate target is already near zero. But the jobs report could increase pressure on the committee to further support growth by pledging to keep interest rates low for even longer than now expected, cutting the interest rate on banks' reserves, or buying additional mortgage securities.

Congress managed to revive long-term unemployment benefits last month, and the House is scheduled to return next week to give final approval to a $26 billion aid bill aimed at helping state governments pay for Medicaid and keep teachers in classrooms.

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