Help wanted to sustain the recovery

By Emily Kaiser

WASHINGTON (BestGrowthStock) – The economic recovery is suddenly looking more robust. If it is going to stay that way, the labor market will need to catch up soon.

In the United States, Canada and China, 2009 ended with a surprisingly strong burst of growth. Some of that was driven by fleeting factors, particularly in the United States where shifts in business inventories accounted for more than half of the fourth quarter’s 5.7 percent annual rate of growth.

The next big test of the revival’s staying power comes on Friday when the U.S. employment report for January is released. Economists polled by Reuters are looking for a slim gain, probably not enough to put a dent in the 10 percent unemployment rate.

“Employment growth may never have been more important for a recovery than in the current one,” said Sal Guatieri, senior economist with BMO Capital Markets in Toronto. “With bank credit still tight and households rebuilding savings, income growth is badly needed to drive spending higher.”

A high jobless rate breeds a host of other ills, including sluggish consumer spending, rising credit defaults and foreclosures, all of which puts a drag on global growth. Consumer spending accounts for roughly 70 percent of U.S. economic activity.

Elevated unemployment is also a big factor in why central banks in the world’s major advanced economies are not in a hurry to raise interest rates. Wages are typically the biggest driver of inflation, and with so many people out of work labor costs are unlikely to spike.

The U.S. Federal Reserve said last week that it would probably keep short-term borrowing costs unusually low for some time. The European Central Bank and Bank of England hold their policy-setting meetings on Thursday, and both are expected to keep rates at record lows.

WHEN WILL JOBS RETURN?

With interest rates already about as low as they can go, there is not much more that monetary policy can do to encourage hiring. Using fiscal policy to help create jobs opens up a whole new set of problems.

Government budgets were battered by costly crisis-fighting efforts, and concerns have been growing over the state of public finances across the developed world.

Those worries will be on display when the White House unveils its budget proposals on Monday. President Barack Obama has already said he plans to freeze spending for three years starting in 2011, although he excluded two of the biggest expenses — defense and health-care programs.

At the same time, Obama has pledged an assortment of tax breaks and spending programs to try to bring down the jobless rate, which has become a political imperative with many lawmakers facing elections in November.

There is a debate brewing among economists about how quickly the U.S. job market will recover. Some argue that because companies slashed payrolls so aggressively in the darkest days of the recession, they will need to rapidly rehire now that demand is beginning to revive.

“Since employment and hours worked were cut sharply below levels warranted by the decline in output, we expect a stronger-than-consensus jobs recovery,” Ethan Harris, head of North American economics for BofA Merrill Lynch Global Research, wrote in a note to clients.

Others say that while this may be true for larger manufacturers, there is evidence that small businesses — typically the biggest source of U.S. job creation — remain reluctant to hire.

A survey in January by the National Federation of Independent Business of small businesses showed that 15 percent expected to cut jobs in the next three months, and just 8 percent planned to create new jobs.

Confidence in the sustainability of the economic recovery is low, and credit remains tight. Some who want to expand and hire can’t get loans, and many who can are wary of taking on more debt.

Kate Drew-Wilkinson, who designs and makes jewelry that she sells at her store in Bisbee, Arizona, said she had been thinking about hiring as many as four more workers, and was encouraged by Obama’s pledge to focus on job creation. Yet the thought of taking on more debt to expand gave her pause.

“One hates to borrow, but I suppose if there was some kind of financial incentive that made sense to me… I would do it,” she said.

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(With additional reporting by Tim Gaynor in Phoenix, Arizona; editing by Leslie Adler)

Help wanted to sustain the recovery