Top Economists Doubt Further Jobless Rate Drop

Economists issue their 2012 forecast for the nation's unemployment rate, a key issue in the November elections.
by | February 3, 2012

The nation's economy continued its upward climb in January as the unemployment rate unexpectedly dropped to 8.3 percent – a three-year low.

The Labor Department reported Friday that employers added an estimated 243,000 jobs last month. Significant gains in the professional and business services, leisure and manufacturing sectors fueled much of the growth.

That’s good news for the Obama administration as the president hits the campaign trail.

But will jobless rate -- a key issue in the 2012 elections -- continue to fall?

The Congressional Budget Office (CBO) forecasted earlier this week that the unemployment rate will average 8.8 percent this year.

Governing surveyed four top economists on Thursday about their projections through the November elections and the remainder of the year. Although they’re encouraged by recent employment reports, most don’t expect the jobless rate to fall much further.

Paul Edelstein, IHS Global Insight Director of Financial Economics

Employers aren’t creating enough jobs to convince Paul Edelstein the unemployment situation will improve anytime soon.

For the unemployment rate to drop, he says about 200,000 new jobs must be added each month, as was the case in January. But rather than hiring workers, he said many businesses are opting to invest in capital.

“There is going to be hiring, but it’s just not going to be what we would normally see at this point in an economic recovery,” Edelstein said.

He projects GDP growth to remain around 2 percent this year. The unemployment rate may edge down over the next few months, but will rebound later in the year. Edelstein expects it to be around 8.8 percent at the end of the year -- in line with the CBO forecast.

“People should maintain modest expectations for this recovery,” he said.

Manufacturing and health care employment should continue to show signs of growth, along with energy companies if oil prices surge. The employment outlook for construction is an unknown, but could take off depending on the housing market, Edelstein said.

John Silvia, Wells Fargo Chief Economist

Economist John Silvia expects the jobless rate to hover around 8.4 and 8.5 percent for the next few months before further dropping later in the year.

“We’re creating jobs, I don’t think there’s any doubt about it,” he said.

Still, he projects the jobless rate to remain at least 8 percent by year's end.

One explanation for the dip in the jobless rate could be the mild winter. Silvia said the warmer weather allowed construction projects to move forward and support more jobs.

He cited a Labor Department report indicating slowing productivity as evidence of potential job gains. The report, released Thursday, shows nonfarm business productivity increased at a 0.7 percent rate in the fourth quarter of 2011, down from 1.9 percent the previous quarter. Companies could begin to hire if they cannot boost output with existing personnel.

State and local governments, which cut about 180,000 jobs last year, have held back private sector employment gains.

“It’s the state and local governments that have really had a negative impact on the economic growth in this cycle,” Silvia said.

If Greece or another country defaults on its debt, it could push the U.S. unemployment rate up, but Silvia said it wouldn’t lead to another recession. Silvia also said developments in the Middle East could sway companies' decisions to jumpstart hiring.

Lynn Reaser, Chief Economist for the Fermanian Business & Economic Institute at Point Loma Nazarene University

Some discouraged workers put obtaining employment on hold after long job searches, often extending more than a year. But now as more positions open, they may elect to re-enter the labor force.

This is part of the reason why Lynn Reaser doesn't expect employment to improve much this year. She projects the unemployment rate to fluctuate between 8 and 8.5 percent, with it likely being closer to 8.5 percent in December.

“More people are either likely to enter the workforce for the first time after graduation or return to the workforce after they’ve dropped out in the past two or three years,” she said.

Many laid-off workers remain in a tough position to find work.

“They can’t move up because they lack skills or education,” Reaser said. “They’re reluctant to take a pay cut and move.”

Even if they find a job elsewhere, some homeowners are hesitant to sell homes in the current housing market.

A number of factors weigh on hiring. Reaser says it will be "a very volatile year with a lot of uncertainty." If Greece or another country defaults on its debt, the U.S. economy would take a significant hit.

“A shock could push us over the edge as opposed to if we had much stronger momentum,” Reaser said.

Richard DeKaser, Parthenon Group Deputy Chief Economist

Further employment growth hinges on several factors, says economist Richard DeKaser.

Many construction workers have been without a job for an extended period, and much-needed improvement in the industry should boost other areas of employment. If state and local government job cuts begin to diminish, that would also push down the jobless rate, DeKaser said.

In addition, DeKaser said he is monitoring news on Iran and its nuclear program, which has the potential to greatly influence oil supplies and prices.

Although many expect Congress to be mostly inactive this year, some employers might decide to wait until after the election to add jobs. “If you are extremely uncertain, you may postpone the hiring decision as long as possible,” DeKaser said.

He projected a jobless rate of 8.25 percent to close the year.

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