AP survey: Next president faces high unemployment

[July 05, 2012]  WASHINGTON (AP) -- A majority of economists in the latest Associated Press Economy Survey expect the national unemployment rate to stay above 6 percent -- the upper bounds of what's considered healthy -- for at least four more years.

If the economists are correct, the job market will still be unhealthy seven years after the Great Recession officially ended in June 2009. That would be the longest stretch of high unemployment since the end of World War II.

And it means the job market and the economy -- President Barack Obama's main political threats -- would remain big challenges in either a second Obama term or President Mitt Romney's first term.

"The election isn't going to be a miracle cure for the unemployment rate -- that's for sure," says Sean Snaith, an economics professor at the University of Central Florida. He thinks unemployment, which is 8.2 percent now, won't drop back to 6 percent until after 2016.

Economists consider a "normal" level to be between 5 percent and 6 percent.

The economists surveyed by the AP foresee an unemployment rate of 8 percent on Election Day. That would be the highest rate any postwar president running for re-election has faced.

The survey results come before the government reports Friday on hiring during June. Fears about the economy escalated after U.S. employers added just 69,000 jobs in May, the fewest in a year and the third straight month of weak job growth.

The AP survey collected the views late last month from 32 private, corporate and academic economists on a range of issues. Among their views:

- The economy will continue to grow only slowly. The average forecast for the April-June period is that GDP grew at an annual rate of 2 percent. That's down from a 2.4 percent forecast in April. The economists think the rate in the final six months of the year will be just 2.3 percent. That's too weak to bring the unemployment rate down.

- Monthly job gains will average 139,000 the rest of this year -- barely enough to keep up with population growth and prevent unemployment from worsening. In their forecast in April, the economists predicted average monthly job gains of 189,000.

- The one step Europe could take that would boost confidence in its financial system quickly would be a bailout program like the Troubled Asset Relief Program, or TARP, that Congress approved in 2008 to rescue U.S. banks after the financial crisis hit.

- The biggest threat to the U.S. economy is the tax increases and spending cuts that will take effect Jan. 1 unless Congress reaches an agreement. Many economists and the International Monetary Fund have warned that these measures would push the economy off a "fiscal cliff" and back into recession.

An unemployment rate of 5 percent to 6 percent is typical of a healthy economy. The rate usually doesn't fall much lower, in part because many people who leave a job or start looking for one after finishing school don't get one right away.

Most economists also say that if the Federal Reserve sought to lower unemployment much further, the economy could overheat and ignite inflation.

Unemployment has fallen below 5 percent, most recently in 2000 and 2007. But hiring during those periods was swollen by bubbles in technology (2000) and real estate (2007) that ended in crashes that sent unemployment back up.

U.S. policymakers are supposed to strive for "full employment" under the Employment Act of 1946. That law defined it as an unemployment rate of 4 percent. Today, most economists, including Fed Chairman Ben Bernanke, define full employment as between 5 percent and 6 percent.

Fifty-fix percent of the economists surveyed by the AP said the unemployment rate wouldn't return to 6 percent until 2016 or later. Thirty-one percent said it would take until 2015.

The economists said high unemployment remains a persistent problem for several reasons. The biggest factor: The economy isn't growing fast enough to cause employers to expand and hire much.

Beth Ann Bovino, deputy chief economist at Standard & Poor's, forecasts growth of about 2 percent this year and next. She doesn't think it will get much better before 2015.

"You need something closer to 4 percent to make a dent in unemployment," she said.

Consumers, businesses and governments are all cutting back on spending to reduce debts, Bovino said. That creates a vicious cycle: Less spending by consumers results in less revenue for companies. Businesses then reduce hiring. And that means fewer people with paychecks to spend.

And even if hiring does pick up, several economists said the unemployment rate will be hard to bring down. That's because millions of Americans have given up looking for work and are no longer counted as unemployed.

Many of those "discouraged workers" will likely resume their job searches as employers start hiring more. But because most won't be hired immediately, the unemployment rate will stay elevated.

Andrew Kohut, president of the Pew Research Center, said presidents find themselves under pressure almost immediately after taking office to improve the economy and job market.

If elected, Romney will likely point out that he inherited a weak economy, Kohut said. Obama has tried the same approach. But voters "still want to know, what have you done for us lately?"

Allen Sinai, chief global economist at Decision Economics, said the United States is in a squeeze: It needs to stimulate growth. Yet it also needs to rein in government spending and budget deficits over the long run.

"I don't envy the next president, whoever he is," Sinai said. "He is going to have one heck of a problem to fix."

[Associated Press; CHRISTOPHER S. RUGABER]

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