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Bad Jobs Day Adds Urgency to Debt Ceiling Discussions

Businesses May Already Be Pulling Back as Risk Increases

SOURCE: AP/Rogelio V. Solis

Corey Perry of Jackson, Mississippi, reviews possible jobs online at a Mississippi state employment center on Thursday, July 7, 2011.

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Adding only 57,000 private-sector jobs in June after adding only 73,000 jobs in May is terrible news after a run of three months where we saw gains of more than 200,000 in each. The problem may, in part, be fear about whether the federal debt ceiling will be raised. Most businesses don’t ramp up hiring when they see a substantial risk of a broad economic falloff. They don’t want to be saddled with staff they don’t need if they don’t have the customers and revenue to justify the payroll costs. Right now the failure to increase the federal debt limit is creating such a risk—and that may well be part of the reason why the economy is dragging.

We’ve shown elsewhere that a two-month failure to raise the debt limit could result in the largest quarterly economic decline since 1947, when relevant data were first reported. That would obviously be a bigger decline than in any quarter of the Great Recession. And the worst quarter of the Great Recession saw a loss of nearly 2 million jobs. (see chart)

Chart 1

Businesses are, at some level, aware of this risk and some are likely reacting to it. With leading Republicans in Congress stressing the distance between the parties, signaling their willingness to let the debt ceiling stay at its current level, and attaching extreme conditions for their support, there’s reason for those who make hiring decisions to be nervous. And that concern may be affecting the jobs market.

We’ve seen this sort of reaction by employers, reducing hiring in response to a perceived threat to the economy, fairly recently. In November 2002, for example, the U.N. Security Council passed Resolution 1441, offering Iraq “a final opportunity to comply with its disarmament obligations,” which heightened concerns that the United States would go to war in the Middle East. This triggered fears of an oil price spike, which would drag on the economy. This was reinforced by movement upward in actual oil prices.

Suddenly, the already-fragile labor market took a nose dive. After gaining 113,000 jobs in October, the economy lost 14,000 in November and 163,000 in December. There was a rebound in January, up 45,000, but the next two months showed losses of more than 150,000.

While it’s always difficult to disaggregate cause and effect in such a situation, the labor market clearly took a beating as the fear of war, and its impact on the economy, rose. We could now be seeing a similar phenomenon. The concern in this case is not the danger of higher oil prices weakening the economy but the economic damage that could be done by the failure to raise the debt ceiling. (see chart)

Indeed, we may be seeing an impact already amid the focus on what might happen if the debt limit is not raised—spiking interest rates, inflation, a permanent loss in the credibility of the United States as a borrower, a second recession, and other disasters.

Just as in late 2002, entering the second year of the Bush presidency, we’re in a fragile labor market now. The jobs situation was absolutely brutal at the close of the Bush presidency when the Great Recession hit bottom—with private-sector job loss of more than 800,000 in President Bush’s last month in office.

There has certainly been major improvement since that low point. After the American Recovery and Reinvestment Act of 2009 was signed into law by President Barack Obama and started to have an effect, private-sector job losses lessened. Recovery Act spending on infrastructure, clean energy investments, unemployment compensation, and other purposes, as well as the tax cuts included in the Recovery Act, had their desired effect of pumping cash into the economy, employing people, revivifying the customers that businesses rely on, and addressing, in part, the jobs crisis.

By early 2010 there were job gains instead of losses and the trend was positive toward the end of the year. In 2011, the three months from February through April, each with job growth of more than 200,000, were encouraging—but that’s not as strong growth as one would hope for at this point in an economic recovery, and it was evident that we were yet to find our way to solid ground. Even that relatively good news, however, came to an end over the last two months. In May we saw only 73,000 net private-sector jobs gained. In June it was only 57,000. (see chart)

This falloff, of course, coincides with attention in Washington, financial markets, and the media turning from the 2011 budget to the debt limit—and when Republicans in Congress and their conservative allies started most pointedly digging in their heels on a debt ceiling increase, attaching extreme conditions for their votes. That’s a situation that would give any rational business pause.

It wouldn’t be at all surprising to see an economic impact given the potential effect of a failure to raise the debt limit and the scary tenor of the discussion. If you’re an employer, there’s a big risk here. That’s not to say every business and corporation has its eyes on the debt limit debate as it makes its decisions. But the doubts about the economy that the debate is creating must certainly be causing greater caution.

Businesses in this country hire millions of people each month, and if that caution is causing just 100,000 or 200,000 fewer hires than would otherwise occur, that would show up as a large impact on net job creation. Concerns over the debt limit certainly aren’t the only thing happening in the economy—but for those who pay attention to such things, it’s the most significant immediate threat.

Michael Ettlinger is the Vice President for Economic Policy at American Progress.

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