In implacable downturn, arsenal of recovery tools dwindling
WASHINGTON — Just when they might be needed the most, the rescue ropes that hauled the nation out of the Great Recession have become badly frayed.
A much-feared “double dip” economic downturn would find interest rates already slashed to near zero by the Federal Reserve and lawmakers leery of voting for billions of stimulus dollars as they face re-election.
The government’s jobs report Friday added to the sense that the recovery is losing steam, signaling that it could be years — not months — before the employment rate returns to prerecession levels.
“We’re adding jobs — but at an excruciatingly slow pace,” said labor market economist Heidi Shierholz of the Economic Policy Institute, a think tank. “Double dip or no, this is going to be an enormously long slog.”
The traditional mechanisms for blunting economic pain and nurturing a recovery are either no longer available or simply not working:
• Unemployment benefits for hundreds of thousands of Americans are running out or have already expired. Successive congressional attempts to extend them anew have failed amid partisan wrangling on Capitol Hill.
• Lower taxes, often used as a quick remedy for economic distress, have already been tried. Now taxes are probably going up. The special homebuyer tax credit expired on April 30, and an array of income and investment tax breaks — pushed through Congress by former President George W. Bush — are due to expire in 2011 without congressional action to extend them.
• Mortgage rates have sunk to their lowest level in more than five decades. That should be good news for the battered housing industry and put cash into the hands of homeowners as they refinance. But a wave of refinancing hasn’t materialized, as the many homeowners who owe more than their homes are worth can’t easily do so.
• The Federal Reserve, in holding a key shortterm interest rate near zero percent since December 2008, cannot spur growth with further
rate cuts. Although there are other steps the Fed can take, such as direct loans, further increasing the money supply or buying mortgage-related securities, many such programs already have ended or are being wound down.
• Federal aid to cash-strapped states, including Medicaid grants and money to avoid layoffs, is drying up, and efforts by President Barack Obama and his congressional allies to extend and enhance them have been thwarted by partisan battles in Congress.
Obama’s plea to stimulate economic growth now and cut deficits later got a mixed response from world leaders at the G-20 summit in Toronto last weekend. And, with polls showing rising concern among U.S. voters over government red-ink spending, Congress hasn’t been a whole lot more receptive.
The Labor Department report showed the overall jobless rate fell to 9.5 percent in June from 9.7 percent in May. But that was largely because many people gave up looking for work, not because employers added enough jobs to bring the rate down.
Economist Mark Zandi, founder of Moody’s Economy.com, said those unemployment numbers “make me nervous. They show that the labor market is losing momentum. And right now, we’re in such a precarious situation.”
Zandi said he thinks the economy will continue to grow, not slip back into recession, “but it’s going to be close,” especially if Congress doesn’t come up with more help for states or extend unemployment insurance.
The recession began in December 2007, according to the National Bureau of Economic Research, the group of academic economists that dates the beginning and end of recessions. The group has not yet announced an end, although many economists say the recession probably ended last summer.
But the recovery may be beginning to weaken under the weight of continued high joblessness, flagging consumer confidence and fears that Europe’s financial crisis will spread to the United States — or at least harm U.S. exporters.
“The economic recovery is clearly faltering,” says Peter Morici, an economist at the University of Maryland.
And what if it falls into double-dip territory? “We stay there,” Morici said. “If we have a negative quarter or two, we may not recover. The economy just doesn’t have enough momentum this time.”