The Guest Blog

Tony Fratto: Obama's Jobless Recovery


Despite Dennis Kneale calling the end of the recession, we may be getting ahead of ourselves with talk of "recovery". It's possible we're finding a bottom, but no one knows whether growth will return this quarter or next.

And when growth does return, the jury's out on whether we'll see a happy V-shaped rebound, or the ugly U- or double-dipped W-shape Nouriel Roubini cautioned against in his interview with Maria Bartiromo last week.

But it's a lock that corporate profits and productivity will lead, markets will follow, but job creation will lag — and probably lag much longer than in any previous recovery because of Obama Administration economic policies.

Recoveries from recessions follow a fairly predictable pattern. In a recession, with slack demand, firms shed workers and idle plants and equipment at a rapid pace in order to bring down costs.

In a nascent recovery, as demand is perceived to pick up, firms generally try to squeeze as much output as possible out of existing capital, rather than by reopening shuttered plants and hiring workers — both of which are extremely costly.

The result is an early increase in productivity growth and a spike in corporate profits, cheered by markets.

But following the two most recent recessions (1990-91; 2000-01), each relatively shallow as recessions go, job growth lagged well after the pick up in the economy. Firms will always wait to hire until they are confident that a recovery is well-established and sustainable.

Over time, profits become predictable and strong productivity growth lowers the cost of labor, and firms begin to hire to increase output.

And rather than hiring, firms also initially take the opportunity early in a recovery to add technology and increase their efficiency.

This was the natural pattern we saw in the 1990s recovery, and again earlier this decade in what critics labeled "Bush's jobless recovery".

What will be different in this recovery, whenever it comes, is firms will be far more cautious about hiring as they determine the marginal return on labor. And that marginal return diminishes significantly as Obama Administration policies raise the cost of doing business generally, and more specifically, the cost of hiring an additional employee.

With the prospect of higher taxes on small businesses and higher costs to meet the demands of the President's health care and energy policies, firms will be loathe to add workers -- essentially pricing workers out of the workplace.

Even with a market rebound and a return to corporate profitability, Obama's jobless recovery will keep unemployment stubbornly high well into next year.

Tony Fratto is a CNBC on-air contributor and most recently served as Deputy Assistant to the President and Deputy Press Secretary for the Bush Administration.