Feels Like Recession, But ...
Though economists say we are now well into our third year of recovery from the 2007-09 recession, high rates of unemployment, continued economic uncertainty, volatile markets and debt-burdened national economies have made many around the world feel like the Great Recession never ended. These factors are prompting many leading forecasting bodies to readjust their views of what lies ahead in 2012. Most predictions are less optimistic now than they were when 2011 began.
In its fall World Economic Outlook, the International Monetary Fund predicted only a 1.6 percent rate of gross domestic product growth in advanced economies by the end of 2011. Even this anemic forecast was qualified by caveats. If European policy-makers are not able to contain the euro-zone crisis or U.S. policy-makers cannot balance support for economic recovery with judicious fiscal policies, authors of the Outlook predict global growth will be much lower. And, another spate of shocks—a major natural disaster or rising political unrest in key nations—could lead to market volatility that will hinder global recovery. They warn that strong coordinated action worldwide will be needed to avoid a decade of stagnation and lost growth in the advanced economies.
On the global stage, while emerging markets are growing, there is strong uncertainty in Europe. If, for example, Greece ultimately defaults on its debt, Merrill Lynch estimates that the shock to growth in Europe will contract overall output by 1.3 percent in 2012. This uncertainty in Europe, led by Greece, is driving volatility in the markets and increased pessimism as other countries across the continent, especially Italy, Ireland, Portugal and Spain, struggle with debt consolidation—and social unrest, as austerity measures are implemented.
Another Jobless Recovery
Poor performance of the job market is keeping pessimism high in the United States. A September CNN/ORC International poll found that 90 percent of Americans surveyed said economic conditions remain poor.
World leaders and economists agree that job growth is the critical factor in improving the global economy. "Inclusive, job-creating growth must be our goal. But today, we risk losing the battle for growth," the International Monetary Fund's Managing Director Christine Lagarde said during a recent speech. "With dark clouds over Europe, and huge uncertainty in the United States, we risk a collapse in global demand."
Revised estimates for global and U.S. growth was the central theme at the annual fall National Association of Business Economists (NABE) conference. The association's October NABE Industry Survey found that 84 percent of respondents expect gross domestic product to grow at a pace of just 2 percent or less from fourth-quarter 2010 to fourth-quarter 2011, up from only 23 percent who forecast such a low level of growth in July.
"Labor market conditions are expected to improve only gradually as job growth remains tepid. Unemployment is expected to remain above 8 percent for the next four years," FedEx Chief Economist Gene Huang said at the conference. "Full employment is not expected to return until 2015."
Pessimism around job growth is exacerbated by growing fear that policy-makers are incapable of reaching the needed consensus to effectively counteract medium- and long-term weaknesses in the U.S. economy. According to the fall NABE Outlook Survey report, the two main challenges for economic growth are:
- Low consumer and business confidence.
- Uncertainty about the ability of policy-makers to agree on effective strategies.
"We are dealing with an unprecedented situation," said Donald Kohn, senior fellow at the Brookings Institution and a former vice chairman of the Federal Reserve, speaking at the conference. "It cannot be a coincidence that the drop in household and business confidence coincided with the debt-ceiling debate."
Political leaders "need to work through their differences to reach sensible solutions," Kohn said.
Despite gloomier revised growth projections, most economists surveyed by the association said they did not expect a double dip: Only 13 percent of the respondents expect the economy to slip back into recession.
In addition, the U.S. trade deficit declined sharply in July and remained unchanged in August. As a result, Goldman Sachs upgraded its 2011 third-quarter gross domestic product forecast.
The Institute of Supply Management's closely watched nonmanufacturing index, while still weak, showed that activity in the nonmanufacturing sector grew in October for the 23rd consecutive month. Its manufacturing report showed that activity in that sector expanded during October for the 27th consecutive month. The overall economy grew for the 29th consecutive month.
"Business investment is the bright spot in the forecast," Huang said. "We expect spending on business equipment and software to increase by 9.2 percent in 2011 and 7.7 percent in 2012." The downside: Many business leaders are investing in capital expenditures such as equipment or technology rather than adding to payrolls.
Economic forecasting has become more difficult because the variables, and economic players on the global field, have expanded. Some factors that will influence prospects for economic growth during 2012 include:
Interest rates. A little over a month after announcing a plan to hold interest rates near zero through at least mid-2013, Federal Reserve Chairman Ben S. Bernanke announced in September that the Fed would sell $400 billion worth of shorter-term securities and buy longer-term ones. The strategy is intended to boost the economy by helping to lower long-term interest rates on mortgages and corporate borrowing and thus encourage investment. Both Fed plans were considered somewhat controversial. Unfortunately, if these approaches do not work well, there are few options left for the Fed to boost growth.
Inflation and consumer spending. According to Towers Watson, employees will get an average salary increase of about 2.8 percent in 2012. This was up slightly from the 2.6 percent employers said they planned for 2011.
Unfortunately, these increases are considered unlikely to keep up with inflation for the majority of employees. If consumer costs outpace wage gains, U.S. consumer spending is unlikely to be a major engine for revving up the economy.
The costs of key goods such as fuel, education, housing and health care will be critical factors influencing consumer spending. In a recent speech, Carl Shapiro, a member of President Barack Obama's Council of Economic Advisers, said: "The economy remains fragile in the aftermath of the housing bust and financial crisis. Consumer confidence has fallen recently, and, on top of that, state and local governments continue to pare spending. That's an ongoing negative contribution" to the recovery.
Housing and construction. In its November report, the U.S. Commerce Department said construction spending rose 0.2 percent in September after reaching 1.6 percent in August. Depending on the market sector, analysts offer varying predictions for growth in real estate sales during 2012. According to a September Reuters poll of economists, there were mixed views on whether the worst would be over for the U.S. housing market by the end of 2011. Overall, the economists surveyed forecast that existing home sales would improve only modestly and most predicted a weakened housing sector for at least a few more years.
Global trade. In September, faced with increasing risks and uncertainty, the World Trade Organization revised downward its estimate for growth in global goods trade in 2011 to 5.8 percent from its previous forecast of 6.5 percent.
Emerging markets' growth. The International Monetary Fund continued to predict robust growth in real gross domestic product of 6.4 percent in emerging and developing economies. Rising employment, a young population, a growing middle class and rising consumption are propelling the growth.
Weak Demand, Skills Shortages
Throughout the recession and recovery, HR professionals have provided insight into some of the key labor market trends preoccupying economists. One insight addresses the question of whether the aftermath of the recession has led to mainly a cyclical or demand-based jobs crisis or to a more-lasting structural problem.
If there is just not enough aggregate demand in the economy to provide the majority of job seekers with work, employment levels should improve once the overall global economy strengthens. But if the problem is more structural—if, for example, new technologies have automated and eliminated entire categories of jobs, or industry skill demands have changed substantially—there could be a growing problem of skills shortages even while unemployment rates stay high.
It is a fair bet that aggregate demand remains the main problem while pockets of skills mismatches persist, despite the high number of job seekers. "It's primarily demand, because we see high unemployment across many industries. It looks very broad-based," Shapiro says. The key: "Not to allow it to turn into a structural problem."
Surveys of HR professionals indicate that there could be at least some areas in the economy where skills shortages may be a factor. For example, data from the Society for Human Resource Management's (SHRM) Leading Indicators of National Employment show that even as employment expectations started to level off in 2011, recruiting difficulty generally continued its slow rise. The recruiting difficulty index is based on the difficulty HR professionals report in finding candidates for strategic positions—generally, jobs with higher and special skill demands.
Similarly, the SHRM Jobs Outlook Survey report for the final quarter of 2011 shows that even as HR professionals' optimism about the job market has gone down, they still report having problems filling skilled jobs. Only 34 percent of respondents have some level of confidence in the U.S. job market for the fourth quarter, a steep drop from the second quarter, while 57 percent expressed some level of optimism about job growth. Three-quarters of respondents said the workers they had the most difficulty hiring in the third quarter were overwhelmingly skilled professionals, distantly followed by skilled manual workers. Finally, a November survey of HR professionals shows that in many industries, new jobs require new skills—in some cases, almost completely new and different skills compared to jobs lost in the recession.
HR and staffing professionals have noticed the irony of having a harder time recruiting while unemployment levels remain so high. The more specific the skills requirements, the more difficult recruiting has been. "For entry-level jobs, it's completely different. But from a skilled jobs perspective, people are in lockdown. They are fearful to make that change," says John Hasna, manager of talent acquisition at TD Ameritrade in Omaha, Neb., and a member of SHRM's Staffing Management Special Expertise Panel. "Even if your company's balance sheet looks good, there is so much uncertainty." According to Hasna, this uncertainty is making many potential job candidates much choosier about accepting job offers. Even unemployed candidates are more reluctant to relocate. "We're getting, 'Maybe at a later time when things are more stable.' They're not willing to take the risk."
Until hiring rates improve and the global economy gains sustainable momentum, this lack of confidence in the future job market is likely to influence both employers and job seekers. Says Hasna, "There's a cycle that needs to be broken."
Risk of Long-Term Unemployment
The recession affected different demographics of workers in a number of ways. For example, an analysis of U.S. Census data from the Social Science Research Council found that during the recession, women's earnings took less of a hit than men's. Women's earnings fell $253 on average compared with a drop of $2,433 for men, across all education levels. While men still out-earn women by a large margin, this trend narrowed the gender wage gap slightly. One explanation for the difference is that sectors dominated by men, such as construction, lost jobs disproportionately from 2007 to 2010. Women are outpacing men in obtaining higher education, and this is likely to influence future wage trends; individuals who never completed high school saw a loss of earnings more than three times greater than those with a graduate or professional degree. However, many state and local government jobs that will be lost in 2012 due to spending cuts are likely held by women.
Throughout the recession and continuing today, the young are more likely to be unemployed or underemployed. Furthermore, an extended jobless recovery or rise in long-term unemployment may influence wage growth. Entering the job market during a time of elevated unemployment has been shown to have a lasting impact on lifetime earnings, so the extended period of joblessness could have a far-reaching influence on Millennials. At the same time, older workers who are laid off are more at risk of long-term unemployment.
"In a downturn this deep and this long, no one is sheltered. There is no broad group that hasn't seen rising unemployment," says Heidi Shierholz, an economist at the Economic Policy Institute.
One of the most striking changes in the U.S. employment situation since the recession began has been the increase in the number of long-term unemployed. It's "like nothing we have seen since the Great Depression," Shierholz says.
Before the recession, long-term unemployment was often viewed as a problem that, unlike many of its European counterparts, the United States had somehow managed to evade. While the United States still has lower long-term unemployment rates than other developed countries studied by the Organisation for Economic Co-operation and Development, it is starting to catch up and had a huge increase in this category of unemployment from 2008 to 2011.
"The way to bring long-term unemployment down is to get jobs back in general," Shierholz says.
The U.S. unemployment rate stood at 9 percent in October, according to the U.S. Bureau of Labor Statistics. The number of long-term unemployed—those jobless for 27 weeks or more—was 5.9 million in October and accounted for 42.4 percent of the unemployed.
Once out of work beyond six months, job seekers' prospects for finding work at wages comparable to those at their previous jobs declines. The risk of the development of a permanently large population of long-term unemployed and underemployed makes the rise in the U.S. long-term unemployment rate from 2008 to 2011 very worrying indeed.
The author is SHRM’s manager of workplace trends and forecasting.