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Ballew: The Outlook for Labor Markets – Slow Healing

Out of Work
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It’s hard to believe the recovery is now moving into its third year. And as predicted, it’s been a rocky road since those challenging days back in 2008. A major reason for the roller coast ride has been sluggish employment gains.

Job growth has lagged all prior post-war recoveries. The lack of jobs is also a contributing factor to the political turmoil the U.S. has experienced through the past two election cycles.

A jobless recovery? Not exactly. Unacceptable job growth for this stage of the recovery? Absolutely.

If investor confidence is to gain traction, it is essential that job creation accelerate and reinforce other factors supporting growth in the U.S.

The sluggish economic recovery has been characterized by a number of sub-par indicators confirming the tepid pace of improvement. GDP growth has struggled to consistently break three percent, private sector investment has lagged past recoveries and investment in real estate has been poor by any standard.

Unfortunately, the most troubling dynamic underscoring the uniqueness of this particular recovery may be the employment situation. Two years in, there are 14 million workers unemployed. 6.2 million of these workers are classified as “long-term unemployed”, which is unprecedented. At the current pace of job creation, the U.S. will return to pre-crisis levels by 2014, 6 years into the recovery!

So what are the factors behind the anemic employment situation?

Several factors are restraining job creation. Lackluster consumer spending growth and fierce competition are forcing many employers to suspend adding workers until they absolutely have to. This occurred in the last two recoveries as well. In addition, sectors like construction have been hit broadside by the bursting housing bubble.

Meanwhile, policy actions have not exactly been “pro-growth” in terms of adding jobs.

Regulatory constraints have increased along with other uncertainties persisting over fiscal and monetary policy. With a subdued economic backdrop it is not surprising that plans to add full-time employees have been restrained across most sectors of the economy.

The challenges associated with the tepid labor markets deeply affect households that are already struggling through a deleveraging process that will likely take a decade or more to play out. Without stronger job growth and income gains, the stress for households will be even more acute. At the same time, sectors reliant on consumer spending will continue to struggle to post top-line growth.

So for investors focused on consumer sectors, a bit of caution is warranted, probably into the middle stages of the decade.

Households are on a journey to rebalance. Unfortunately, without more robust job creation, this journey is going to take an even longer time to complete.

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Paul Ballew is the Chief Economist for Nationwide Mutual Insurance Company . He joined Nationwide in November 2007 and is responsible for providing macro-economic analysis and commentary for Nationwide's broad portfolio of protection and retirement business lines. Ballew also maintains his advisory role with the Fed as well as serving a number of Boards of non-profit organizations.