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Job Losses Lessen, but Recovery Remains Far Off

The expected loss of 360,000 jobs in June signals a period of rising output and climbing unemployment, dampening prospects for economic recovery

Sure, unemployment keeps getting worse. But look at the bright side: The rate of deterioration isn't as bad as it was a few months ago.

That's the latest talking point from economic optimists ahead of the July 2 jobs report. If the report does show that job losses slowed dramatically for the fifth consecutive month, look for stocks to rally.

Time for a reality check. Even though the rate of decline in employment has slowed, most economists say that significant job growth remains a year or more away. Most employers either don't need more workers or can't afford to hire them. Even after business starts to pick up, they will hold off as long as possible before adding to payrolls, economists predict.

As if that's not bad enough for the unemployed, the competition for jobs keeps increasing because population growth adds about 1% to the labor force every year. Factor in that labor productivity has been growing at roughly 2% a year—meaning companies can produce the same output with fewer workers. It takes vigorous economic growth to offset those factors, says Michael Englund, chief economist of Action Economics in Boulder, Colo.

Unemployment Rate Inches Toward 10%

Most likely, then, we are headed for a period in which economic output will rise and yet unemployment will climb right along with it. That would be a large-scale repeat of the so-called "job-loss recovery" that followed the brief recession of 2001.

On July 2, the Labor Dept. will announce labor figures for June. Economists are expecting the department to say that the U.S. lost around 360,000 nonfarm jobs (vs. 345,000 in May) and that the unemployment rate rose to 9.6% (vs. 9.4% in May).

Although the rate of job loss is significantly below that of November through March, when the economy lost an average of 670,000 jobs per month, it's still bad by historical standards. In contrast, the U.S. lost 325,000 jobs in the worst month of the 2001 recession.

Few economists see better times ahead—in the near future. A Blue Chip Economic Indicators' survey of economists released June 10 showed an average forecast of a 9.1% unemployment rate in 2009—and an even worse 9.7% rate in 2010. That closely matches the results of a separate survey of economists conducted by Bloomberg, according to figures as of June 30. More pessimistic than average, IHS Global Insight is looking for the unemployment rate to peak at 10.3% in the second quarter of 2010 and then gradually fall to 8% by 2013.

Payroll unemployment has shrunk 3.9% year-over-year though May. Meanwhile, increases in real pay per worker in the past few months have been negligible. "There's still some ways to go," says Standard & Poor's Senior Economist Beth Ann Bovino.

Sears Unveils Layoff Protection Plan

Not only does unemployment devastate the families of those who lose jobs, but it spills over to the rest of the economy. Even people who still have their jobs cut back on spending out of fear that they could be next. On June 30, the Conference Board's Consumer Confidence Index unexpectedly slid after three consecutive months of gains, with a greater number of respondents expressing worries about the job market.

The same day, Sears announced it would try to combat those fears with a layoff protection plan. Starting July 6, the company will credit to the customer one-twelfth of the purchase price of any appliance over $399 for each month that the buyer is out of work, up to full credit for people who are unemployed for a complete year. Kevin Brown, the company's chief marketing officer for appliances, says Sears customers "have concerns not only about the general economy but their own personal situation, so they're deferring…They're just in a spot where their concerns over the future are holding them back."

Sliding consumer spending and continued job losses could prove to be mutually reinforcing trends that delay a recovery. "The hope is that if job losses moderate and consumers become more aggressive in their spending, businesses will be convinced to curtail further job cutting," says Mark Zandi, chief economist for Moody's "The risk is that these improvements will be overwhelmed by other problems and the vicious cycle will continue into early next year."

New Hires Will Be Contract Workers

Zandi says that rising foreclosures, coupled with rising unemployment, are the "most significant threat" to the recession ending this year. "Unless foreclosures peak and house prices stop falling, nothing good happens," says Zandi. Real estate values in 20 major cities decreased 18.1% in April from a year earlier—the smallest decline in six months— according to the S&P/Case-Shiller index released on June 30. But delinquency rates on the least risky mortgages more than doubled in the first quarter from a year earlier, the Office of the Comptroller of the Currency and the Office of Thrift Supervision reported the same day.

Eventually employment will start to spring back. Some employers are indicating that they're ready to start hiring, though many of those jobs will likely be contract rather than staff positions. "The worst of the recession is behind us," says Bernard Baumohl, chief economist of the Economic Outlook, a Princeton (N.J.)-based forecasting firm. "Employers have already cut to the bone; if they cut much more they'll end up amputating [limbs]."

David Hensley, an economist for JPMorgan Chase (JPM), adds: "There is a progression in place where you're going from very deep contraction to lesser rates of contraction, to stability, and into growth. The fact that payroll job losses are moderating means that's just a stepping stone on the way to sustainable recovery."

But there are a lot of stepping stones between here and a healthy job market.

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