MONEY

Why You Can't Count on Economic Recovery

Yes, the employment numbers have been very upbeat. But they mask some major problems.

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The economy has been doing surprisingly well for the last few months, so I’m taking a look at all the positive statistics to come out lately to see how good they really are and why. Last week, I focused on the solid developments from manufacturing and auto sales. Today is about areas where the numbers’ beauty really is skin deep.

The big news now is unemployment. Employers added 200,000 jobs last month, according to the Labor Department. This drops the unemployment rate to 8.5 percent and is the sixth month in a row in which the economy has added at least 100,000 jobs. Last year, the economy added 1.6 million jobs, better than the 940,000 added in 2010.

Unfortunately, as regular readers know, there are two reasons the unemployment rate goes down and adding jobs is only one of them. The other is because people have given up looking for work and thus decreased the total number of job seekers. If the same number of people were seeking work in November as in 2007, the jobless rate would have been 11 percent.

Consider this: In November, the Labor Department reported unemployment was down in 351 U.S. cities from a year earlier BUT only 239 cities added jobs over the same period. This is why it is important to ignore the official unemployment rate and look at the U-6 number. This also measures people who have given up looking but still want work,  as well as those in part-time jobs who’d prefer to be working full time. That number can increase when the official number drops, but it also declined last month – from 15.6 percent to 15.2 percent.

So with both those rates in synch everything should be great, right? Hopefully, but it’s still iffy. Having a job doesn’t mean keeping a job and a lot of the jobs added are holiday-time retail positions. This brings us to our next issue: The troubling increase in retail sales.

While sales at major retail chains rose 3.4 percent compared with December 2010, it came at a very high cost. Retailers had to offer major discounts to hit that number and as a result they sold more at a smaller profit. Target, J.C. Penney and Kohl’s have lowered their already-low fourth quarter earnings expectations. They were just some of the many retailers who said the holiday season was “highly promotional.” That is biz speak for big price cuts. This does note bode well for the first quarter of 2012 because those retailers (and the companies who supply them) aren’t going to keep all those new hires if no one is buying.

As discussed in the previous post, the reasons for the solidly good numbers in manufacturing and auto sales are the virtuous cycle of people buying and business expanding to meet increased demand. For that to continue, more consumers will have to earn more money – either by having jobs or by getting paid more for the jobs they have.

For employers to hire more or start giving raises, they have to think that the economy has seen all the fallout from the financial crisis. It has not. Banks have yet to account for the loss of all the money loaned out against assets whose worth continues to shrink. Until that happens, it is crazy to act – and spend – as if the economy were on solid ground.

As anyone can see, we are in an economy which is profiting the few at the expense of the many. Set aside any ideological issues around that statement and remember one thing: That is not sustainable. It will not lead to long-term growth. If the consumer is to continue to drive the U.S. economy, the consumer has to be prosperous—in headlines, and in reality.

Last updated: Jan 11, 2012

CONSTANTINE VON HOFFMAN | Columnist

Constantine von Hoffman is a writer and sometime standup comedian. His work has appeared in Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, and Boston Magazine.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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