Jobs stats offer hope as recovery drags along

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January 14, 2012

Anonymous Daily Star The Daily Star Sat Jan 14, 2012, 02:25 AM EST

Readers who have suffered from the economic downturn should take heart in the employment statistics released last week.

Unemployment fell to 8.5% as the economy added 200,000 jobs in December. Employers added 1.6 million workers in 2011, the best year for workers since 2006.

Equipment orders and the average work week also increased, making the possibility of a double-dip recession unlikely in the opinions of many economists. But some serious risks still threaten the recovery.

Sovereign debt still hangs over Europe's collective head like a sword of Damocles. The 17-country eurozone took another hit this week when Germany announced that its economy may be entering a recession. The International Monetary Fund also announced this week that Greece may default on its debt in March.

Such problems may seem distant for the average American, but nearly one-quarter of U.S. exports are sold to Europe. And American banks have lent some $113 billion to Greece, Ireland, Portugal and Spain, so if any of those countries defaults, credit will tighten across the Atlantic.

Another major problem is stagnant wages, which have hindered U.S. economic growth for decades. Consumer spending fuels roughly 70 percent of U.S. gross domestic product, so workers need expendable income for any meaningful recovery to take place.

Unfortunately, the Federal Reserve has few viable options to stimulate demand. The Fed's preferred method is to lower interest rates, but they are already near zero.

Another option is quantitative easing -- targeted bond purchases to ease the balance sheets of participating banks. But this method does little for those who are unemployed, instead benefiting those least inclined to spend in a weak economy.

The Washington Post reported last week that families earning on average of $45,000 a year spent 91 percent of their after-tax income in 2010, while the wealthiest 20 percent spent 62 percent.

But the Post reported that because of quantitative easing, the top 10 percent of earners were able to save $500 on average by refinancing mortgages. Most of those in the bottom 20 percent saved nothing; only 14 percent of those Americans have mortgages, and only 5 percent own stocks directly.

"The Fed can pump an extra $2 trillion into the economy, but it can't control where it goes," said Dhaval Joshi of BCA Research. "We're not saying it didn't help the economy, but if you look at who it benefits, you see that it fuels stock prices and corporate profits but isn't having much impact on wages and employment."

The Fed controls only monetary policy and lacks the necessary tools to stimulate consumer spending. Congress and President Barack Obama control fiscal policy and, hopeless as this may sound, must work together to nurture this recovery as it grows.