A Stubbornly High Jobless Rate Could Stymie Bush

The Bush Administration got a rude jolt when the unemployment rate surged to 7.8% in June from 7.5% the previous month and 7.2% in April. And a key question for the President's reelection campaign is whether the rate is headed higher.

According to most economists, the answer is no. Unemployment, says the consensus, will stay around current levels at least until the end of the year. dri/McGraw-Hill Inc. economist David Wyss believes the economy will grow at a modest 214% to 212% annual rate--enough to keep the unemployment rate from moving any higher. Wyss also notes that the surprising jump in unemployment over the last few months was largely driven by an unexpected surge in people looking for work, which he believes will not be repeated anytime soon.

But Mark Zandi, an economist at Regional Financial Associates Inc., an economic-forecasting firm, says the unemployment rate could hit a disturbingly high 8.4% in November (chart). Zandi doesn't dispute Wyss's economic-growth forecast, but he parts company on the dynamics of the labor markets. Simply put, Zandi says the unemployment surge of the past few months was no fluke. Indeed, the unemployment rate has been on the rise since April. With the economy on a recovery path, he believes a lot of people who had stopped seeking work during the recession began looking for jobs this year. But the economy isn't growing fast enough to absorb all of those new job seekers, declares Zandi.

His higher unemployment-rate forecast is built on a 3.1% annual growth rate in the labor force, which is how fast the labor force was growing in the first six months of the year. That's faster than the long-term rate of 1.6%. But given the falloff in job seekers during the prolonged recession, that higher number is not out of line, he maintains. "The unemployment rate in the months ahead will not be good news for the Administration," says Zandi.