© Randy Bish/Politicalcartoons.com
Because otherwise the ride could get a whole lot rougher.
Friday's jobs numbers showed that the economy produced a meager 54,000 new jobs in May with weakness across all sectors. The data capped a week of reports pointing to a sudden, unexpected slowdown in the recovery.
"It is now pretty clear that the economy ran into a brick wall last month," said Paul Ashworth, chief U.S. economist at Capital Economics.
Prior to this week most data had been pointing to a slow but steady increase in the economy's momentum. What took the wind out of the recovery's sails so suddenly, and will the doldrums last?
On top of the list is a surge in gasoline prices that has forced consumers to tighten spending on the rest of their household budget. Job growth in the retail, leisure and hospitality industries, which had been showing healthy advances, ground to a halt last month.
Floods and deadly tornadoes shut down some businesses in the southern half of the nation last month and may have depressed the jobs count. Some analysts also pointed to a slowdown in U.S. manufacturing because of a shortage of parts as Japanese suppliers continue to rebuild after a devastating earthquake in March.
The impact of those factors should dissipate in the summer and fall. Japanese suppliers are rebuilding faster than initial estimates suggested. In the past month, oil prices have fallen from a peak of $114 a barrel to under $100. Gasoline prices are beginning to ease off too; the average pump price is down 4 percent from a peak of $3.97 a gallon just two weeks ago.
Once those forces are no longer holding back growth, many analysts believe, the economy's underlying strength will restore momentum and get the recovery and job growth back on track.
There are troubling signs, though, that the recovery faces more fundamental, long-term threats. That list begins with the failure of Congress to give the Treasury legal authority to borrow enough money to pay all the government's expenses.
On Thursday, a second major credit rating agency warned Congress and the White House that if they don't agree on a way to raise the nation's borrowing limit, the U.S. government could lose its top debt rating. Such a downgrade would likely force up interest rates and raise borrowing costs, creating a headwind strong enough to increase the risk of another recession.
"We don't have a very positive outlook for job creation in the next few months," said William Dunkelberg, chief economist at the the National Federation of Independent Businesses, whose members this week reported in a monthly survey that they're cutting back on hiring plans. "The big issue for us is confidence. We don't have any confidence in the leadership that they're going to solve this problem."
The solution itself could spell trouble. At roughly $1.5 trillion, the federal budget deficit represents about 10 percent of gross domestic product. Closing that deficit too quickly, with either deep spending cuts, tax increases or both, could send the economy back into recession. Spending cuts by cash-strapped state and local governments have already eliminated nearly 450,000 jobs since September 2008.
In May, state and local governments cut 28,000 jobs, the most since November, while private businesses hired only 83,000 new workers.
Perhaps the biggest force holding back the recovery is the housing market, still mired in its deepest downturn since the Great Depression. There was no improvement in May, as home builders sat on the sidelines for the fifth spring since the housing market collapsed in late 2006.
"In every cycle we have come out of, construction has always been a major factor in the recovery, going back to the end of World War II and even back to the '30s," former Federal Reserve Chairman Alan Greenspan told CNBC Friday. "This is the first time when construction has not come out of this."
The collapse of the housing market has stunted job growth for several reasons. Apart from begetting jobs directly in building trades, new home construction creates related jobs in fields such as real estate sales and mortgage lending. Growth in demand for home furnishings and appliances has also been hurt.
More broadly, falling home prices are robbing American consumers of their savings and weighing on consumer confidence. Home values are in free-fall in many parts of the country as lenders struggle to unload millions of foreclosed properties by sharply cutting prices. Housing industry analysts say that the foreclosure pipeline will take several more years to clear.
Even if the latest "pause" in job growth is temporary, the pace of hiring is expected to remain painfully slow. Economists are still debating why the current recovery has been so sluggish. But nearly two years after the recession ended, the rebound is far slower than past recoveries.
"This remains a horribly weak economic recovery. We're still looking at payrolls today that show 7 million fewer jobs compared to the peak of January 2008," said John Lonski, an economist at Moody's Capital Markets Group. "Until we make more progress on the jobs front, until we start to generate jobs at a rate of at least 300,000 to 350,000 per month, we're going to be disappointed with the pace of activity."
"We're not economists, but how does raising the debt ceiling ("top debt rating") fix the credit rating of a country?"
Answer: The same way a credit card company upping the limit on a maxed-out credit card allows you to keep using it. You can actually take a cash advance (at an incredibly high interest rate) to pay the monthly bill on that very same credit card. Paying the bill on time makes the appearance that "everything's under control"...and your credit rating is safe. Does it solve any problems? No. Does it make things even harder down the road? Sure does. Do Americans do it ALL THE TIME? You betcha.