With Job Losses Less Than Expected, Is Economy Recovering?

The latest in obsessive economic tea-leaf watching has yielded a pleasant surprise. The government reports that U.S. employers tossed a mere 36,000 people from their jobs in February and the jobless rate held steady at 9.7%. Are happy days here again? You'd think so if you read the quotes from economists in that article. But two key factors will determine whether the economy is recovering: Productivity and consumer spending.

Before getting into those factors, let's look at the bad news. Five million Americans were unemployed in February -- over 40% of whom have been so for at least half a year. And if you count the underemployed -- those people whose employers have cut their hours or put them on part-time status -- 16.8% of the work force is underemployed, up from 16.5% in January.

The bad news hints at the first factor that will determine whether the economy will recover: Productivity. And that statistic has been doing exceptionally well -- hitting 6.9% in the fourth quarter of 2009 -- as companies squeeze more work out of fewer people, even as their growth remains somewhat stagnant. This is great for profits but makes those looking for work frustrated.

Meanwhile, those un- and underemployed Americans contribute to the second factor that will determine whether the economy recovers: Consumer spending. How so? With consumer spending accounting for 67% of economic growth in this country, those people without jobs or with less income than they're used to are not in any position to boost their spending on consumer goods and services.

Before they can even think about spending more, they either need to make more money or get access to consumer debt. But banks -- wisely, in my view -- are hesitant to extend credit to people who can't pay it back. And as long as the market for securitizing such loans remains stagnant, banks won't get fees for originating sub-standard loans -- that they can immediately sell -- so they are not on the hook for the likely losses.

If we see signs that businesses are unable to meet rapidly growing demand, then they'll start hiring only if they think the profits to be gained from those additional people exceed the additional costs. But until the economy becomes less dependent on consumer spending for its growth, such rapid growth appears unlikely.

We can't get growth until workers start to get jobs so they have more money to buy more stuff. But companies won't hire workers until they see economic growth, which depends on those people having more money.

With 36,000 more people losing jobs in February, things may be less bad than they were a year ago. But we can't get out of this snake-biting-its-tail situation until we start to become far more reliant on business spending, rather than on consumer demand, as the spur for economic growth.