Bernanke Offers Jobless Recovery as Humphrey-Hawkins Hopes Fade

By Craig Torres

Feb. 23 (Bloomberg) -- Hubert Humphrey and Augustus Hawkins wouldn’t like what Ben S. Bernanke has to say to Congress tomorrow.

The Federal Reserve chairman, delivering semiannual testimony required in legislation written by the late lawmakers, will describe a U.S. economy returning to growth next year without generating many new jobs. Even with credit markets thawing, Fed officials see unemployment persisting at 8 percent or higher through the final three months of 2010.

“We could have an awkward situation where the recession ends and the job-loss situation continues for some time,” says Christopher Rupkey, chief financial economist at Bank of Tokyo Mitsubishi UFJ Ltd. in New York. That “probably hasn’t been a factor that has pressured the Fed since the 1990-1991 recession.”

A recovery with slow job growth would keep pressure on the Fed to hold interest rates around zero and to continue or expand billions of dollars in lending programs and asset purchases. It would also mark a failure to fulfill the mandate of the Humphrey-Hawkins Full Employment and Balanced Growth Act, signed into law by President Jimmy Carter on Oct. 27, 1978, that the central bank achieve both maximum employment and stable prices.

“We’ve got a lot to talk about,” says Representative Maxine Waters, a California Democrat who succeeded Hawkins in Congress in 1991. She serves on the House Financial Services Committee, which will hear from Bernanke on Feb. 25, the day after he meets with the Senate Banking Committee.

Presidential Nominee

Hawkins died in 2007; the bill’s other author, Minnesota Senator Humphrey -- a former Democratic vice president and 1968 presidential nominee -- died in 1978 before the measure was approved.

Bernanke, the 55-year-old Fed chairman, says returning to lower levels of unemployment depends on financial stability and improved flows of credit. The Fed has used its balance sheet to try to compensate for the pullback in bank lending, more than doubling Fed credit to the economy to $1.9 trillion.

Preventing higher unemployment “depends critically on policy,” Bernanke told the National Press Club in Washington on Feb. 18. “If we can take strong and aggressive action, including the Fed’s actions to try to improve credit markets, I think we can break the back of this thing and we will begin to see improvements in 2009.”

While some Fed officials expect economic growth to resume in the latter half of this year, unemployment may not get below 7 percent until 2011 or even later, according to the latest forecast.

Jobless Recovery

That means the U.S. may be in for its third jobless recovery since 1991. The recession bottomed in March of that year, and unemployment kept increasing for 15 months, reaching 7.8 percent in June 1992. Similarly, the last recession ended in November 2001, and unemployment didn’t peak until reaching 6.3 percent in June 2003.

“We have to expect a similar kind of outcome” in the next recovery, says Conrad DeQuadros, partner at RDQ Economics LLC in New York.

Job losses this time around may be broader and longer- lasting, suggesting they will be even more difficult to overcome when the economy eventually starts growing again.

Employers slashed 598,000 jobs in January, the biggest monthly decline since December 1974. Of the workers affected, 48.5 percent were terminated permanently, the highest proportion in government statistics going back to 1967.

That’s an indication fewer companies are trying to “hoard” labor. Employers in industries that are likely to shrink have little reason to retain workers as long as possible or lay them off temporarily to avoid retraining costs.

Eliminating Positions

Retailers including Circuit City Stores Inc., which filed for bankruptcy last year, have trimmed 592,000 jobs since November 2007, eliminating 45,000 positions in January alone.

In financial services, employment fell by 42,000 last month following 25 bank closures in 2008. The Federal Deposit Insurance Corp. classified 171 banks as “problem” in the third quarter and said industry earnings fell 94 percent from the previous year.

Manufacturing employment dropped by 207,000 in January, the largest one-month decline since October 1982. More factory jobs will vanish as General Motors Corp. and Chrysler LLC discontinue models and close plants to avoid bankruptcy.

Companies are terminating workers or reducing hours even faster than they are trimming output -- causing productivity in the fourth quarter to increase at a 3.2 percent annual rate, more than economists had forecast.

Broad Decline

What’s more, the decline in employment is broader than ever. A Labor Department index that compares the number of industries hiring with the number cutting jobs hit a record low of 25 in January. That means 75 percent of the 271 industries tracked were firing and only 25 percent were adding workers.

“The labor force is now having a more difficult time returning to employment, and that absolutely will create pressure to keep the policy response aggressive,” says Abiel Reinhart, economist at JPMorgan Securities Inc. in New York. “You also see a larger chunk of people leaving the labor force altogether.”

JPMorgan expects the Fed to keep the benchmark lending rate at zero to 0.25 percent for the next two years, not raising rates until at least 2011.

President Barack Obama may also need to expand the $787 billion fiscal-stimulus package he signed into law Feb. 17.

Tax Breaks

Chris Varvares, president of Macroeconomic Advisers LLC in St. Louis, says Obama’s tax breaks and government investment will keep the peak unemployment rate at about 8.8 percent instead of around 9.5 percent without the federal spending. A jobless rate that lingers above 8 percent means “we may have to have several expansions of unemployment benefits,” he says.

Former House Financial Services Committee Chairman Jim Leach says the worst thing policy makers can do is not to do enough.

“It is an extraordinary challenge for the Fed and the Congress,” says Leach, now a visiting professor at Princeton University in New Jersey. “One of the lessons of the ‘30s is that in 1937 Franklin Roosevelt, fearing inflationary pressures, reversed gears on fiscal policy. And so, all of a sudden, the economy began to weaken again.”

While the Fed can’t cut interest rates any more, it still has plenty of tools. Bernanke has already said the Fed is studying purchases of long-term Treasuries, a move that may lower interest rates for consumers and businesses.

The Fed could also broaden the collateral it will accept in a program designed to finance auto, small-business and credit- card loans. The Fed said this facility could expand to $1 trillion from $200 billion.

“As aggressive as the policy response has been to date, a high unemployment rate raises questions about whether that has been enough or whether we are in store for a lot more,” says Brian Sack, a former Fed economist and vice president at Macroeconomic Advisers.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.