WASHINGTON -- There is a central underlying problem with the economy at the moment: too many workers chasing too few jobs.
The economy is expanding too weakly to absorb the new entrants to the labor force, 700,000 in the past two months alone. And employers are relying on overtime rather than hiring to meet what anemic consumer demand there is. Job creation actually went into reverse in June for the first time in five months, pushing the unemployment rate to 7.8 percent, its highest level in eight years.
Much of the stubbornly high jobless rate in recent times actually has been the result of good news. The unemployment figures include only people actively seeking work, and the prospects of better times ahead have brought the disillusioned and the desperate back into the job market alongside thousands of graduating students. Their mass arrival is undercutting the very optimism that helped produce it.
"It could be a self-fulfilling nightmare," said Paul W. Boltz, vice president of T. Rowe Price. "The question for policy-makers is, 'How can we accelerate the growth rate?" Consumer spending accounts for two-thirds of U.S. economic activity. Without an increase, the recovery can go nowhere.
People still appear more intent on paying off old debts than incurring new ones. They also have less money to spend. Incomes over the past year have risen an average of 2.2 percentage points less than the inflation rate of 3.5 percent.
"The bottom line is that the gain in the economy we have had this year has not generated much income. Certainly, the consumer wasn't there this quarter," said Diane Swonk, a First Chicago Corp. economist.
"If we don't see more jobs in the third quarter, the risk of a fourth quarter like we had last year [when the economy went into reverse] goes up exponentially," she said.
Fear drove the Federal Reserve, roundly criticized for failing to pre-empt last year's double-dip recession, to drop its discount rate yesterday to 3 percent from 3.5 percent in an effort to forestall a "triple-dip."
The discount rate is the rate at which the Fed lends money to banks. It helps set the floor for the general level of interest rates, including the prime rate, and ultimately affects other types of credit.
With some interest rates already quite low, it's not clear that further cuts will generate much of a rebound.
"I really suspect we have a big demographic problem with housing. We have basically run out of yuppies," said Ed Yardeni, chief economist with C. J. Lawrence of New York who has lowered his projection of economic growth in the second quarter to 1.7 percent from 2 percent with the caveat that it could be below 1.5 percent.
Retail sales, which exploded in January and February, have gone flat, and orders for durable goods -- items that last more than three years, such as refrigerators and dishwashers -- fell 2.4 percent in May after increasing in March and April. Consumer spending, which increased 5 percent in the first quarter, is expected to increase about 1 in the second quarter.
As well as being stalled economically, the country is politically stymied. This recovery is missing a crucial element: fiscal stimulus. All the talk of tax cuts for the middle class and capital gains breaks for rich investors has come to nought in an election year stand-off between President Bush and the Democratic-controlled Congress.
Meanwhile, 10 million Americans are out of work, an estimated 1 million are too discouraged to look for work, 6 million have only part-time jobs, and the economy stubbornly resists offering them better opportunities.