More jobs and more jobless

Opinion: May 17, 2010 at 12:00a.m.

By Kenneth D’Amica

McClatchy-Tribune

Many Americans are wondering how the unemployment rate could increase from 9.7 percent to 9.9 percent during April when the U.S. economy added 290,000 new jobs.

The answer is simple: The rate increased because many unemployed people who were discouraged and had stopped looking for work re-entered the job market and became statistics again.

Though the economic news has improved significantly in recent months, significant uncertainties persist. The unemployment increase serves as a reminder that the economy is still on the mend.

The American Institute for Economic Research has been studying and analyzing U.S. economic trends since the Great Depression. On May 3 we reported, for the first time in almost six years, that all of the leading economic indicators we analyze that show discernable trend lines are tracking up, or expanding. This includes such important factors as new orders for capital goods, average manufacturing workweek, and the ratio of sales to inventories.

We also reported that a second set of economic figures, what we call the “primary roughly coincident” indicators, also strengthened in April. This includes industrial production, manufacturing and trade sales, and gross domestic product.

But there are reasons for concern as well.

Consumer spending

Recent employment gains, for example — 573,000 new jobs in February, March and April — have not yet translated into significantly increased consumer spending. This can be seen in the two leading economic indicators that are not clearly trending upward: new orders for consumer goods and changes in consumer debt. We upgraded the consumer debt category in our most recent analysis of business-cycle trends, but not because consumers are spending significantly more and taking on additional debt. We did so because the rate at which consumer debt is shrinking has slowed.

The decline in consumer debt has been driven mostly by reductions in credit card debt, which may have as much to do with the banks’ stricter lending standards as with consumers’ unwillingness to spend.

There are also other reasons for concern. Though the most recent data showed a large increase in new-home sales — prompted, no doubt, by the First-Time Homebuyer tax credit Washington dished up as part of its stimulus plan — property values continue to fall. The tax credit expired on April 30 and it’s unclear whether buyer enthusiasm will continue.

We’re also c0ncerned by what we see in the primary “lagging” indicators, such as the average duration of unemployment and the value of manufacturing and trade inventories and commercial and industrial loans.

Lagging indicators

An increase in the lagging indicators would confirm a strong recovery. Instead, all six indices continue to contract.

Almost half of all unemployed people have been without jobs for six months or more. The average now exceeds 31 weeks, nearly double the pre-recession level. The value of commercial and industrial loans continues to fall. This is the capital that typically fuels the economy — that businesses use to grow. Similar to the decreases in consumer debt, the declining business-loan values reflect unwillingness both to lend and borrow, as well as uncertainty about the strength and depth of the recovery.

This uncertainty is not limited to banks and borrowers. Last month, the National Bureau of Economic Research’s Business-Cycle Dating Committee — the official arbiter of turning points in the business cycle (when expansions and recessions begin and end) — met to discuss whether the end of the recession could be determined. Amid some dissent, they decided the available data weren’t sufficient to make the call.

Despite the positive signs, many hurdles lie ahead. The European credit crisis poses a potential problem and our own fiscal concerns remain unresolved.

The leading indicators tell us the economy is recovering. But only time will tell how long it will take for the more than 8 million jobs lost in the recession to reappear — and how many may be lost forever.

Kenneth D’Amica is a research associate with the American Institute for Economic Research, Great Barrington, Mass. Distributed by McClatchy-Tribune Information Services.