As we enter the final stretch of the year, the consensus is being formed that the worst is indeed behind us, and the conjecture is being focused on how the shape of the recovery for the US economy is going to look like. From the federal reserve, to leading economists everywhere as well as the central bankers of the G-20, all seem united in their opinion that the lows reached by the financial markets in United States during spring 2009 are now firmly behind it
Having said that, the key economic indicator that will define the nature of recovery are the unemployment levels, and the ability of the US economy to replenish the 7.2 million jobs lost since the recession began in December 2007 ( maybe 8 million based on recent reports). In addition to replacing the 7.2 million jobs, the economy needs an additional 1.2 million jobs a year just to keep up with population growth. The key question becomes, where will the new jobs come from. Health care is among the usual suspects, but the Labor department estimates health care will add only about 300,000 jobs a year through 2016. Other sectors could include alternative energy and education. President Obama envisions the US to create 5 million “green” jobs in the next decade, from solar and wind to energy efficiency, and with a “new normal” in crude prices establishing itself quietly ( >$60 a barrel) , alternative energy might just finally deliver in accordance with its long awaited potential.
As noted by George Friedman (Stratfor) in his latest book, “the next hundred years“, technology developments in US has seen a pattern, starting with the basic research done resulting in conceptual breakthroughs, modest implementations and some commercial applications. Next comes a pressing crisis that forces the government to infuse large amounts of money into the project to speed development towards specific needs. Finally, the private sector takes advantage of commercial applications of this technology to build entire industries and drive economic growth. He mentions this in context of the two big technological developments of the 20th century that drove unprecedented growth in American economy,. First was the Interstate system started by the Eisenhower administration inspired by the German autobahn’s immense utility in the World War II. Next was the development of ARPANET out of defense funding to improve distant communications, that ultimately spawned the internet industry. Whether this pattern will extend itself to alternative energy, is a question that might hold the key to the recovery of jobs lost.
Finally, let us look at how historically unemployment has fared. Since 1948, the average rate of unemployment has been 5.6 percent, and the figure is similar at 6 % for the last 30 years. To reach this historic normal of 6 %, the US economy will need to add around 10 million jobs in the next five years, translating to roughly 2 million jobs in a year. Good news is that in 1990s. on an average 2.15 million private-sector jobs were added annually, so this pace of job creation has a historical precedent.
To conclude, based on current forecasts, the annually averaged unemployment rate for calendar year 2009 will be around 9.2 %, which compares with rates of 9.7 percent in 1982, and 9.6 percent in 1983. This would suggest unemployment levels will remain in the high 9 percent in 2010, which is comparable to most economists forecasts of low 10 percent unemployment. However, the silver lining in this cloud just might be 2011, like 1984 was in the previous recession, when the unemployment rate fell from 9.6 to 7.5 within a year. I believe the unprecedented speed of the correction waves in the labor markets that we have seen so far in this recession that surprised everyone on its way down, carries in itself the seeds of recovery. And when the recovery wave starts to rebound before 2011, it will surprise the consensus again on its way up.
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