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Stimulus not likely do much, but Fed expected to try anyway

Markets' recent rise comes ahead of 2-day meeting

Gail MarksJarvis

September 12, 2012

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As Federal Reserve governors file into their two-day meeting on the economy Wednesday, the dismal image of millions of people giving up their search for work will hover over the proceedings.

The Fed has a mandate to deal with unemployment, and it must try to stimulate an economic environment that will provide jobs. But while many economists think there is little the Federal Reserve can do to squeeze more hiring out of nervous employers, economists think Chairman Ben Bernanke will feel compelled to try anyway.

That expectation has been propelling stocks higher since Bernanke gave a speech in Jackson Hole, Wyo., in late August that sounded like he thought he could do more to stimulate the economy. Investors tend to buy stocks when they expect stimulus, even if there is little certainty it will be effective.

Such thinking played out Tuesday: The Dow Jones industrial average closed at 13,323, the highest level in about five years, based on the assumption that the Fed will deliver on Thursday and a German court will allow Germany to participate in bailout plans considered crucial for financially stressed European countries such as Spain.

In Jackson Hole, Bernanke expressed concern about the long-term health of the economy because so many Americans have been unemployed or underemployed or have stopped looking for work in frustration. At the same time, companies have remained reluctant to hire.

"The stagnation of the labor market in particular is a grave concern," Bernanke said during his speech, noting "enormous suffering" and a "waste of human talent." Beyond the immediate concerns, Bernanke said, he is worried about the long-term strain on the economy.

"Persistently high levels of unemployment will wreak structural damage on our economy that could last for many years," he said.

Bernanke clearly was referring to research showing that when people struggle to find work for a long time, they start losing the skills that employers seek. People eventually get discouraged and give up.

You could see that in the jobs report that sent chills across economist circles Friday.

Only 63.5 percent of the potential workforce in the U.S. is working or looking for work — the lowest participation rate in the past 30 years. And the numbers have been getting worse, as employers have postponed hiring amid deepening recession in Europe, a slowing Chinese economy and the weakest recovery the U.S. has seen since the Depression.

In July, 63.7 percent of potential workers were working or looking for work. In 2009, as the economy was in the midst of the financial crisis, it was better than today: 64.6 percent. In 2002, after the last recession, labor force participation was 66.6 percent, as a housing boom helped pull the economy out of its slump.

Although layoffs have subsided recently, hiring has been anemic and many people have been out of work for long stretches of time. Many have accepted part-time work. A broader federal government measure shows 14.7 percent of Americans either unemployed or underemployed in part-time work.

But as people have been unemployed for long stretches, many are giving up in frustration.

The fate of the long-term unemployed is anyone's guess, said Gluskin Sheff economist David Rosenberg. For some, he said, "it's off to the brother-in-law's basement if he'll take him in again."

About 2.7 million people have given up over the last year, and Rosenberg said "America has as many idle adult workers as the entire German population. I think that is far more important than the unemployment rate."

He calculated that unemployment would be at 8.4 percent instead of the recent 8.1 percent if people hadn't stopped looking.

Some older workers, who have faced the longest periods of unemployment, have retired when able to collect early Social Security benefits. Younger workers have stayed in school, despite discouraging employment numbers for recent college graduates.

The recent unemployment rate among 20-to-24-year-olds with bachelor's degrees was 9 percent. And the Economic Policy Institute found that 19.1 percent of recent college graduates are underemployed — meaning they've settled for part-time work or jobs far below those they expected to get with a bachelor's degrees.

And since pay levels for each job build on pay from the previous job, the number of underpaid or unemployed people today will have an impact on the economy for many years to come.

Besides the immediate strain of a job loss, a study by Pew Research Center shows that Americans lose confidence in themselves when they can't find work.

"Americans believe that having a secure job is by far the most important requirement for being in the middle class," said researcher Wendy Wang, of the Research Center.

In a survey of American adults, Pew found that after the job troubles and housing losses of the last few years, 32 percent of Americans now identify themselves as lower class. That compares with 25 percent in 2008.

Pew researchers also said these people also see their prospects dropping further. About three-quarters said it's harder to get ahead now than 10 years ago, and about half said hard work brings success.

The Federal Reserve has been trying to spur job growth since 2008, but joblessness has remained entrenched, leaving economists to question the impact of more rounds of stimulus known as quantitative easing, or buying bonds to keep interest rates low and money available.

Yet, with joblessness still high, economists such as Joseph Kalish, strategist for Ned Davis Research, think the Fed likely will give quantitative easing another shot.

Although he said there is little the Fed can do about the biggest problems facing the economy, namely Europe and a surge in tax increases at the end of this year, "the Fed may feel obligated to act in order to fulfill its mandate."

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis