Unemployment still high despite increase in GDP

By Matthew Meyerhofer

Santa Clara economists expressed tentative optimism that the U.S. economy is headed out of recession for good following a 7.2 percent growth in the Gross Domestic Product (GDP) last quarter.

However, they say that the job market is not improving at the same rate.

"We've been seeing the indications of economic growth, but at the same time we're not seeing a very rapid recovery of the job situation," said William Sundstrum, chair of Santa Clara's department of economics. "The somewhat unusual thing that's been happening in this recovery is that the aggregate economy has been growing very quickly but the number of people finding work has not been."

Some economists say the unemployment rate is a better indicator of the nation's economic health. Sundstrum said a resurgence in employment figures is crucial for continued economic recovery.

"If there are more people getting employed, then you've got more people out there buying stuff," Sundstrum said. "Their incomes are more certain and people's confidence goes up, but it's hard to predict at this point whether this huge burst in growth is going to continue."

Professor of economics Mario Belotti said recovery in employment markets will require continued periods of high growth.

The economy will have to grow at 4 or 5 percent for the next several quarters in order to reduce the unemployment rate, Belotti said.

"After November 2001, we went through a period of economic recovery, except that the economy was very slow and during the recovery we continued to lose jobs," said Belotti. "The economy did not create enough jobs to absorb the new people that entered into the labor force."

Belotti pointed to recent economic trends, suggesting the worst is now over and that a long recovery is likely.

"The tendency recently has been to have shorter recessions and to have longer periods of prosperity," Belotti said. "Next year the economy ought to grow somewhere around 4 or 5 percent, and then the year after that, it's very hard to project."

Other economists are reserving their judgment entirely about the nation's economic state.

"I think this is a very difficult time to make any forecast, and that the thing to do is to wait and see what happens in the next quarter," said Thomas Russell, a Santa Clara associate professor of economics. "We're not going to get 7.2 percent growth again next quarter."

Sundstrum said the GDP growth numbers are "quite amazing," but emphasized the unpredictability of the current economic situation.

"There are things that can happen that would be shocks to the economy that could send investor or consumer confidence down again, like if the war [in Iraq] really does drag on and there doesn't appear to be any resolution in sight," Sundstrum said.

Russell said that if casualties in Iraq continue at the current rate, people could get the feeling that the United States has entered another Vietnam-type conflict, which could change the national psyche and adversely affect consumer spending.

"If we continue to lose people and more countries get involved, this could create some negativity," Belotti said.

When asked what is responsible for the economic turnaround, most economists pointed to the low interest rates, which allowed for property refinancing.

"The most important factor that provided us with this growth was the low interest rates," Belotti said. "It made it possible to buy houses and to refinance homes at a lower rate, which gave some people some extra income."

Economists say it is difficult to project just how much of an effect President George W. Bush's tax cuts had on helping the economy recover.

"I don't think it's very easy to say. A lot of economists are skeptical about the kind of tax cut he offered, which was significantly aimed at high income earners," Sundstrum said.

"I think some of the growth is due to the tax cut," Russell said. "People got checks in the mail and went out and spent them."

Contact Matthew Meyerhofer at (408) 554-4546 or at mmeyerfer@scu.edu.