The jobless rate in the United States will never go back to where it was before the global financial crisis and people will have to get used to a “new normal” of 6-7 percent even if the economy starts revving up from where it is now, observers tell CNBC.
As the U.S. government prepares to release nonfarm payroll numbers for July on Friday, economists expect about 100,000 jobs created during the month and the unemployment rate to remain steady at 8.2 percent. 80,000 positions were added in June.
However, some investors say the consensus is too optimistic and higher structural unemployment is here to stay.
“We really have a fundamental change in the workforce,” Michael Yoshikami, Founder and CEO of Destination Wealth Management told CNBC Asia’s “Squawk Box” on Friday.
“We should have realized that the unemployment rate is simply not going to go back where it was and we should start realizing that there is a new normal and the real unemployment rate in the United States will be 6-7 percent, where the recovery is in full steam, rather than 4 percent.”
Nonetheless, he expects job growth to be positive albeit “very sluggish” going forward.
Patrick O’Keefe, Director of Economic Research with consulting firm J.H. Cohn, agrees that job growth is simply not as robust as it should be and that unemployment will be higher than normal. He estimates that 65,000 positions were added in July and that the public sector will also continue to shrink as municipal governments cut workers.
“With respect to the trend rate of both GDP growth and employment growth, we should be looking at a slower trend rate of growth in total output and a higher natural rate of unemployment, or full employment rate, if you will,” O’Keefe said. “When you look at the indicators of demand in the economy, the output measure, income measures, the economy here is decelerating and employers are very reluctant to take on additional workers.”
Most of the growth that we’ll see in the coming month, as was the case in June, will be in temporary and part-time positions, he added.
Fed Will Act on ‘Disastrous’ Jobs Number
The U.S. Federal Reserve conceded on Wednesday that the economy has “decelerated somewhat” but stopped short of offering new stimulus to spur growth. Fed officials nevertheless showed it was prepared to do more to support an ailing economy.
U.S. economic growth slowed to 1.5 percent in the second quarter as consumer spending faltered, and unemployment remains high. Job growth slowed sharply in the second quarter to just 75,000 jobs per month from 226,000 in the first quarter.
While the Fed may need to act to prop up the economy, it is also treading a fine line between injecting too much liquidity and doing enough to provide a boost to the labor market that, while is weakening, is not “disastrous,” Yoshikami of Destination said. The Fed is closely watching the jobs number but it will take more than a below-consensus number for the Fed to act, he added.
“What’s really an issue is how the Fed going to walk that fine line, if the number is 65, 70, 75 (thousand),” he said. “Yeah, it’s under consensus, but it’s not disastrous. A disastrous number is green light for Fed action.”
The Fed has already expanded its balance sheet twice since 2008, the first time in 2008 by $600 billion in new assets and new liabilities. The second round was in 2010 when it purchased $1.25 trillion of mortgage-backed securities in order to support the sagging mortgage market.
O’Keefe expressed doubts that anything the Fed can do this time round that will turn the economy and labor market around.
“Even if they have a trick up their sleeve which is going to do something other than increase the excess reserves which is already at record levels and drive down interest rates that are already at record lows, it’s very hard to see what’s in the monetary toolbox that can do anything in the short turn to turn around the rate of growth,” O’Keefe said.
And even if the number on Friday came in at 65,000, it may not warrant “immediate action” from the Fed because it is a small difference between 100,000 in a labor market of 133 million people. Data will have to deteriorate further.
— By CNBC’s Jean Chua.