Stiglitz: US employment recovery ‘not on the cards’

The US economic recovery won’t be strong enough to curb rising unemployment in the next two years, Nobel laureate Joseph Stiglitz said.

“Some people are declaring victory—the recession is behind us,” Stiglitz said at an event in Pittsburgh sponsored by critics of globalization before tomorrow’s meeting of the Group of 20 nations. “The fact is that the unemployment rate is still high—likely to go up—and for these individuals the recession is not over”
US President Barack Obama, UK Prime Minister Gordon Brown and other leaders are converging on Pittsburgh as the global economy shows signs of rebounding from the worst recession since World War II. G-20 members will discuss rules to redraw the banking system as well as ways to sustain the recovery.

Stiglitz, who teaches at Columbia University in New York, said the US economy needs to expand at a rate of at least 3.2 percent to create new jobs and that performance is “not on the cards” for 2010 and 2011. The unemployment rate climbed to 9.7 percent in August, its highest point in a quarter-century. The euro region rate is around 9.5 percent.

U.S. Economic Contraction Slowed in 2nd Quarter

The American economy’s long decline leveled off significantly from April through June, crystallizing expectations of a turnaround in the second half of the year. Real gross domestic product in the United States decreased at an annual rate of 1.0 percent in the second quarter of 2009, according to the Bureau of Economic Analysis. In the first quarter, real GDP decreased 6.4 percent.


Consumer spending, which makes up about 70 percent of overall economic activity, has continued to fall as fearful Americans save more. Real personal consumption expenditures decreased 1.0 percent in the second quarter, in contrast to an increase of 0.6 percent in the first.

Likewise, the second quarter figure reflected selling off of inventory and sharply declining residential and nonresidential investment. Real nonresidential fixed investment decreased 10.9 percent, compared with a decrease of 39.2 percent. Nonresidential structures decreased 15.1 percent, compared with a decrease of 43.6 percent. Equipment and software decreased 8.4 percent, compared with a decrease of 36.4 percent. Real residential fixed investment decreased 22.8 percent, compared with a decrease of 38.2 percent.

Partly offset by government spending

Partial offsets were contributions from government spending at all levels. Real federal government consumption expenditures and gross investment increased 11.0 percent in the second quarter, in contrast to a decrease of 4.3 percent in the first. National defense increased 13.3 percent, in contrast to a decrease of 5.1 percent. Nondefense increased 6.2 percent, in contrast to a decrease of 2.5 percent. Real state and local government consumption expenditures and gross investment increased 3.6 percent, in contrast to a decrease of 1.5 percent.

Government spending, helped by the first payments from the administration’s $787 billion stimulus package, propped up activity in the latest quarter and accounted for 20 percent of the country’s output.

Consumers are going to be less of an engine of growth

Many economists express concern about what will happen once government spending lets up if consumers remain worried about losing their jobs and their weakened household finances.

“The most severe part of the decline is behind us,” said Joshua Shapiro, chief United States economist at MFR, an economic consulting firm. “But it’s hard to say how sustainable whatever bounce we might see will be. It depends largely on whether the consumer has the genuine ability to spend, or if it’s all just government cheese being handed out.”

Consumers cut their spending at an annual rate of 1.2 percent in the second quarter and saved more than 5 percent of their disposable income, a stark turnaround from their free-spending behavior during the housing boom.

Historically, American consumers have not recognized that a recession is over until well after the economy has begun expanding, in part because they focus on job creation. Still, recent improvements in the stock market, as well as the easing pace of job losses, could help consumers feel that they are finally rebuilding their nest eggs.

Bright economic prospects

Now, even as jobs are vanishing and wages remain flat, many forecasters expect the downturn to level off. Economists say that businesses as diverse as small manufacturers and big automakers are poised to rebuild their depleted inventories, which fell by an annualized $141 billion in the second quarter. That restocking could spur economic growth later this year.

“We’re going from recession to recovery, but at least early on, it’s not going to feel like one,” said the chief economist at Moody’s Economy.com, Mark Zandi. Bright economic spots include a pickup in the stock market, corporate profits and some housing markets, coupled with a slowing pace of job losses.

US Inflation Rate Fall in June

The annual US inflation rate for the 12 months ended in June, 2009 was -1.43 percent. The US inflation rate one year ago was 5.02 percent. The fall in inflation rates from May to June provides evidence that the short term inflation trend is down. If that trend continues, we should see an inflation rate for the 12 months ended in July, 2009 that is close to -1.57 percent. The average rate over the last 10 years was 2.70%. Lower inflation over the last 12 months compared to the average inflation over the last 10 years serves as an indicator that the long term trend in the US Inflation Rate is down. Inflation expectations should be adjusted accordingly.

Need to Tighten to Prevent Inflation

The US Government's inflation economics policy attempts to control inflation. High inflation and negative inflation can have damaging effects on the economy. The Federal Reserve will need to rein in accommodative measures to prevent inflation.

"Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period," Bernanke said in an op-ed article dated July 20 seen on the Wall Street Journal website.

Bernanke pointed out two ways the Fed can tighten policy: raising the interest rate on bank reserves held at the Fed, and reducing the overall stock of reserves.