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Popular Economics Weekly

Nonfarm payroll employment continued to decline in August (-216,000), and the unemployment rate rose to 9.7 percent, reported the U.S. Bureau of Labor Statistics. Although job losses continued in many of the major industry sectors in August, the declines have moderated in recent months.

But the question remains how long will it take for employment to turn positive again? The guess is anywhere from later this year to mid-2010. Why? Because this recession had the greatest job losses since WWII (and the Great Depression). Most jobless recoveries have taken 2 years or less to return to normal. The G. W. Bush 2001 recovery was longest—it was 4 years before the job losses were replaced.

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It looks like manufacturing will be the sector that recovers first. The Fed’s Beige Book survey of its 12 Reserve Districts remarked on the nascent manufacturing recovery, saying that “most districts reported modest improvements in the manufacturing sector.”

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The Institute of Supply Managers latest manufacturing survey also reported a huge jump in new orders, employment, and prices. Its index surged above 50 percent—a sign of expansion—for the first time in 18 months.

Real estate may be the second sector to recover, believe it or not. With home prices and interest rates making record drops—prices are back to 2003 levels—a combination of greater affordability and pent up demand from record household formation has brought increases in both new and existing-home sales during this selling season.

Lastly will come the recovery in consumer spending. So-called personal consumption expenditures are the main measure, and they now are showing a very slight upward trend, in spite of record indebtedness. More improvement will depend on rising personal income, which hasn’t happened yet. But the huge cut back in expenses (e.g., paying down debts to 2005 levels and discount shopping) will enable consumers as well as businesses to spend and invest more in coming quarters.

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Much of this recovery will be due to ARRA, the American Reinvestment and Recovery Act, which may have added 2 to 3 percent to second economic growth, according to Obama’s White House Council of Economic Advisors in their just released second quarter report.

"…our multiplier analysis and estimates from a wide range of private and public sector forecasters confirm the estimates from the statistical projection analysis. There is broad agreement that the ARRA has added between 2 and 3 percentage points to baseline real GDP growth in the second quarter of 2009 and around 3 percentage points in the third quarter.”

There is also broad agreement among economists that it has likely added between 600,000 and 1.1 million to employment (again, relative to what would have happened without stimulus) as of the third quarter.

Retail sales are beginning to recover, increasing 2.7 percent from July to August (seasonally adjusted), though sales are off 5.3 percent from August 2008 (retail ex food services decreased 6.3 percent). The main impetus was a 10.6 percent surge in auto sales due to the cash-for-clunkers program. Excluding motor vehicles, retail sales were up 1.1 percent. This confirms the prediction for higher GDP economic growth in the third quarter.

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But it begs the question as to when job formation will bring back the more than 7 million workers who have lost jobs in this recession to date. Even though it is the worst recession since the Great Depression, and given the fact that next year is an election year, my bet is that we will see strong job growth by next summer.

Harlan Green © 2009