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Job Growth Is Too Fragile for Additional Austerity

The construction sector, which was hit especially hard by the Great Recession, is showing signs of recovery, adding 30,000 jobs in December after having lost almost 2 million jobs since the beginning of the Great Recession.

Despite uncertainty regarding the fiscal showdown in December, the U.S. economy once again proved its resilience last month by adding 155,000 jobs, according to new figures released today by the U.S. Bureau of Labor Statistics. The economy is still in a weak recovery period, however, and the prospect of further spending cuts remains the biggest threat to robust economic growth. President Barack Obama and Congress should focus on accelerating job growth through policies that strengthen the middle class—such as investments in infrastructure, education, and science—and reject any calls for additional austerity in the short term.

The private sector has now added new jobs for each of the past 34 months, indicating that steady progress is being made in the recovery from the worst economic crisis since the Great Depression. The unemployment rate in December held steady at 7.8 percent but has dropped significantly from a year ago, when it was 8.5 percent.

In further good news, the construction sector, which was hit especially hard by the Great Recession, is showing signs of recovery, adding 30,000 jobs in December after having lost almost 2 million jobs since the beginning of the Great Recession. In addition, employment increased in manufacturing, as well as in several other sectors, including health care and eating and drinking establishments.

As today’s jobs report makes clear, the economy continues to head in the right direction—though not fast enough, meaning it still faces a number of risks. Given the deep jobs hole the Great Recession put us in, the pace of the recovery is far too slow.

While the economy has added more than 5.3 million private-sector jobs since February 2010, more than 12 million people still remain unemployed. Thirty-nine percent of the unemployed have been looking for a job for 27 weeks or more, which is essentially unchanged from November 2012. Similarly, the number of people working part time but who would prefer to work full time, as well as the number of “discouraged workers” in the economy—those who would like to work but have given up looking for employment in frustration—changed little.

In a further sign of the fragility of the recovery, average hourly wages of all private-sector workers are not keeping pace with inflation and in fact declined nearly 2 percent in real terms in the year through December 2012. Wage declines indicate that the jobs being created tend to be found in low-wage, insecure parts of the economy—such as the retail sector, the leisure and hospitality industry, and in home health care and nursing homes—where pay, benefits, and protections are low and turnover is high.

Research from the National Employment Law Project shows that low-wage jobs made up 21 percent of all job losses during the recession, but made up nearly 60 percent of job gains during the recovery, while middle-class jobs accounted for 60 percent of jobs lost in the recession but only 22 percent of new jobs in the recovery.

At the current three-month job-growth pace seen in today’s jobs data, the U.S. economy will not recover to “full employment”—the level of employment when the economy is running at full potential—for more than two decades. While the employment growth trend remains well above the pace of the 2000s business cycle—at which speed we would never recover to the prerecession employment rate of 5 percent—employment in the United States would not recover to full employment until late this decade even under the rapid jobs-growth pace of the 1990s economic boom.

In short, the economy is moving in the right direction but at too slow a rate. Moreover, the economy remains quite vulnerable to negative shocks.

Analysts estimate that the recent deal to avoid the so-called fiscal cliff will reduce GDP growth by 1 percentage point, in large part because the deal allowed the payroll tax cut to expire—meaning most Americans’ paychecks will be slightly smaller, leading them to be more cautious about spending money and boosting the economy. As a result, expectations for GDP growth this year are in the 2 percent to 3 percent range—a rate that is not great but is good enough so that unemployment is likely to continue to slowly decline. While our economy is strong enough to withstand this level of austerity, any additional short-term austerity—as could happen in the next few months when Congress debates whether to postpone the “sequester” and increase the country’s debt limit—would likely reduce economic growth to such a level that job growth slows to a crawl.

Austerity has already plunged Great Britain and much of Europe into a double-dip recession, driving unemployment through the roof. Additional U.S. budget cuts in 2013 would make the level of austerity in the United States more severe than those countries have experienced recently.

At a minimum, Congress needs to refrain from additional short-term budget cuts. Far better would be to pass legislation that provides additional near-term job creation measures—such as needed investments in infrastructure and a large-scale mortgage-refinancing program—and make cuts several years in the future when the economy is in a stronger position, as President Obama pushed for as part of a grand bargain in the fiscal negotiations in December.

As today’s jobs report makes clear, the country is moving forward and creating jobs. Now is not the time for additional austerity, however, as the economy is in no shape for such a beating.

David Madland is a Senior Fellow at the Center for American Progress.