Analysts: Job losses could drown stimulus

Obama's response to economic crisis is tested as unemployment soars

Washington Post
By Neil Irwin and Annys Shin
updated 3:55 a.m. ET, Sat., March. 7, 2009

The nation is losing jobs so quickly that the government, racing to deal with the crisis, is having trouble keeping up.

The U.S. unemployment rate last month leapt half a percentage point, to 8.1 percent, the highest level since 1983, according to data released yesterday. The stunning pace of job losses raises the possibility that, perhaps as early as this summer, one in 10 Americans will be out of a job even though they are actively looking for work. It also means that the government faces even more pressure to take further action to stabilize the economy and the financial system.

President Obama, speaking in Columbus, Ohio, to police cadets whose jobs were saved with money from the $787 billion stimulus package, called the new unemployment figures "astounding."

"We have a responsibility to act," he said, "and that's what I intend to do."

Analysts increasingly view the administration's actions so far as insufficient given the scope of the problem. The stimulus package was designed to "save or create" 3.5 million jobs, according to the administration. But the nation has already lost 4.4 million jobs since the start of the recession. Many banks and other financial institutions, whose health is critical to the economy, are teetering, and the Treasury Department has yet to finalize the details of its plans to remove from their balance sheets the toxic assets dragging them down.

'A step behind'"It's premature to say we need another stimulus, but the economy is performing much worse than when [the law] was signed, and the odds are increasing that we'll need a bigger policy response," said Mark Zandi of Moody's Economy.com, who has advised Democratic lawmakers. "What we've learned is policy has been a step behind this whole downturn. It's important to get a step ahead."

The International Monetary Fund yesterday urged governments worldwide to consider additional fiscal stimulus, noting that the public sector must help prevent a collapse of confidence.

Consumer confidence in the U.S. economy has already been driven dangerously low by layoffs across nearly every sector. Last month alone, employers slashed 651,000 jobs from their payrolls, and job losses in December and January were far worse than originally reported, according to revised data released yesterday. Since December, employers have cut jobs at the sharpest pace since 1975.

But even the current job-loss figures mask the degree of pain among American workers. A broader measure, which includes people who want a job and have given up looking and those working part time but who want full-time work, rose nearly one percentage point, to 14.8 percent.

"I think what it shows is neither the government nor many economists have a grasp yet of how bad the economy really is right now," said Bernard Baumohl, chief global economist at the Economic Outlook Group. "We can't get our arms around what's going on."

There is little reason to think conditions for workers will get better in the coming months and many reasons to think the steep decline will continue; employment tends to lag behind overall growth in the economy by several months, and the nation, by all accounts, remains in recession. There have been some signs lately that consumer spending is stabilizing at low levels, but even if that trend holds up, it would probably take until summer for job losses to slow.

Bold enough?Economists are now calling into question whether the intricate suite of policies crafted by Congress, the Obama administration and the Federal Reserve are bold enough to deal with the scope of the economic damage.

"Up until the third quarter, we thought we were on track for a relatively moderate recession, but then in the fourth quarter, everything fell apart," said David Wyss, chief economist at Standard & Poor's.

The Obama administration's budget, released in late February, assumes that the jobless rate will average 8.1 percent this year. That now appears unlikely, which in turn could make officials rethink their approach to the crisis.

Regulators, for instance, are conducting "stress tests" of major banks so that the Treasury Department can better determine what kind of financial support they might need. Those tests assume that, in a particularly bleak scenario, the unemployment rate will average 8.9 percent this year and 10.3 percent next year. But if the government projections on unemployment turn out to be too rosy, officials could underestimate the trouble banks are in. A higher unemployment rate means greater losses for banks because more people default on their loans.
The worsening employment picture, meanwhile, could also create a hole too big for the stimulus package to fill.

As a result, government needs to step up and do more, said Heather Boushey, senior economist with the liberal Center for American Progress.

"It's not going to be enough, folks. I hate to break it to you," she said.

Foreclosure threatAnalysts generally expect stimulus spending to have a noticeable impact on the economy during the second half of this year. The money will continue to spur large-scale economic activity through the end of next year, with lesser impact in 2011 and beyond. But for many Americans, the need is urgent now.

That's particularly true for homeowners, more and more of whom are facing the threat of foreclosure. Rising unemployment will exacerbate their problems and could undermine the effectiveness of the Obama administration's plan to make mortgages more affordable.

"Last year, the role of unemployment was a factor in foreclosures, but it is undoubtedly more important now," said Paul Willen, an economist at the Federal Reserve Bank of Boston. "If you have no income, it's hard to pay any mortgage at all."

Andrew Tilton, a senior economist at Goldman Sachs, offered some reasons for optimism. The stimulus money has already started to flow, after all, and a joint Treasury-Fed program to prop up lending launched this week. "For the first time in a while, at least, it's possible to at least see how things could turn out better," Tilton said.