By A Ramezani, Press TV
6 June 2012
6 June 2012
For the first time since last June, the US unemployment rate rose to 8.2 percent in May from 8.1 percent in April. Mainstream media warns that the American economy is in trouble again, just three years after the government announced that the worst recession in US history was finally over.
Last week’s jobs report showed the so-called underemployment rate -- which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking -- increased to 14.8 percent from 14.5 percent.
The disappointing data intensified the pessimism of investors who were already worried about a debt crisis in Europe with no sign of a solution. The report clobbered the US stocks as well. The Dow Jones industrial average immediately fell 275 points, its worst day of the year. And the Standard & Poor's 500 index was nearly 10 percent below its 2012 high.
But the situation got more desperate when the Department of Commerce announced another weak report showing the economy slowed from an annual growth rate of 3 percent in the final quarter of 2011 to a meager 1.9 percent in the first three months of this year. In its report, the department revised down its previous 2.2 percent growth prediction for the first quarter. This is the fourth time over the past four quarters the Department of Commerce is revising down its announced growth rates. Economists say the recent fall in growth was largely because governments and consumers spent less, and businesses restocked their supplies more slowly.
Despite the dismal reports on jobs and growth, President Obama claims his Democratic administration has prevented the economy from plunging into yet another Great Depression after the 2008 Wall Street financial meltdown. During a speech in Minnesota on Friday, he also promised the job market would improve saying, "We do have better days ahead." However, economists doubt the achievability of the president’s pledge. They believe that the growth pace is too slow to make a dent in the unemployment rate.
At present, 13 million Americans are jobless, including 5.5 million unemployed for more than six months. The figures remain near record highs. At the current rate of net job creation, it would require over ten years to put all those currently unemployed back to work. That is without taking into account any future economic shocks from the US, Europe or other regions. Experts believe the government needs to keep the economic growth fairly high - above three percent - if it really wants to improve the job market.
Some say the jobs report confirmed that the labor market has reversed direction after showing "so much promise" from November through March. Jeffrey Rosen at Briefing.com says layoffs have started to increase recently and "that means that businesses are not in a wait-and-see mode but are actively looking to pare down costs amid the possibility of an economic slowdown."
Meanwhile, some financial analysts say the disappointing job figures put pressure on the Federal Reserve to take additional steps to help boost the economy, by keeping the long-term interest rate at a record low of almost zero percent and purchasing government bonds.
The Fed cut interest rates to near zero overnight in late 2008. It also has said it expects to keep rates "exceptionally low" through at least late 2014. On Friday, Fed officials shifted that date out to April 2015. Some economists say there is not much the Fed can do, arguing that interest rates are already too low.
With regard to quantitative measures, the central bank has so far bought nearly $2.5 trillion in bonds to try to spur a stronger recovery. The Fed undertook two rounds of massive purchases of government bonds, one in March 2009 and another in November 2010. The programs were aimed at helping drive long-term interest rates down and stimulating stock prices. However, it was the too-big-to-fail banks and several car companies that received the lion’s share of the government financial support.
The six big US banks - JPMorgan, Bank of America, Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley - accounted for more than 60 percent of the average daily debt to the Fed by all publicly traded US banks, money managers and investment- services firms.
The cost of borrowing for the big banks is lower than that of smaller firms because lenders believe the government won't let them go under. The Fed helped America's biggest financial firms get bigger and be able to keep paying their managers as much as they did before the height of the financial crisis.
With the weak jobs report announced last week, a number of analysts say that the central bank's Federal Open Market Committee now has the cover to take action at its June 19-20 meeting, with one option being the launch of a third round of quantitative easing, or bond purchases.
Economists are divided over the benefits of more quantitative easing. Proponents say the cash to be injected into financial institutions will be translated into loans which will help economy recover as people and companies begin to spend again. But opponents say that the Fed’s move to pump more money into the economy will stoke inflation and make it more difficult to get out of the economic crisis, especially when the receivers of the cash - big banks - will not spend it in ways they should. They are anxious the banks might use the cash to invest abroad or to pay higher executive compensations.
With the US GDP growth falling, the manufacturing growth slowing, the unemployment rate rising, the Bush-era tax cuts program expiring by year end, the interest rate being kept near zero percent, and with the euro zone crisis deteriorating, the question is how effective a third round of bond purchases would be to bolster the flagging economy?
