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Seeing Through the Fog

First, the good news: U.S. unemployment didn't increase in December, remaining at the 10% level from November, according to figures released Friday by the U.S. Labor Department. Now the bad: the economy shed 85,000 jobs last month, a dramatic change from the revised 4,000 nonfarm payroll rise in November, which marked the first payrolls increase in two years.

That's not entirely a good sign for the recovery. Economists had hoped that the nonfarm payroll number would remain relatively flat, even if unemployment edged up a bit. But there's a silver lining--temporary services added 47,00 jobs last month, an indication of recovering employer confidence. Since reaching a low in July, the Labor Department reported, temp jobs have increased by 166,000.

Still, at the start of this congressional election year, there's more pressure than ever on Democrats--who hold the White House and both chambers of Congress--to help create jobs. In a sign of just how dire the situation is, President Obama is expected to make a jobs-related announcement Friday afternoon at 2:40 p.m. EST.

According to the Labor Department, job losses in December were primarily in the areas of construction, manufacturing and wholesale trade. Continuing a long-term trend, the manufacturing sector shed 27,000 jobs in December, average monthly job losses in the last six months of the year were only about a quarter of their levels in the first half of 2009. In addition to temporary work, jobs increased in the health care sector. About 9.2 million people are currently working part time but hope to find full-time jobs, a level that has been relatively unchanged since last March.

The economy is still growing despite the lackluster jobs picture, said Lakshman Achuthan, president of the Economic Cycle Research Institute, a New York forecasting firm. During the last recovery following the tech bust of 2001, the economy didn't start adding jobs until 21 months after the recession officially ended, Achuthan said.

"I expect the payroll number to go positive within a few months," he said. Even with choppy employment growth, "this is a stronger recovery in jobs than we've seen in the last 20 years."

The decline in payroll jobs will also likely postpone a recovery in consumer confidence, which provides critical fuel for an acceleration in business activity. When the economy is shedding 600,000 jobs a month, as it was in early 2009, "that destroys confidence of everybody who's still working," said Achuthan.

But with unemployment rates flat, consumers might start being less worried about losing their jobs and they might start thinking more about making long-delayed purchases. It's the snap back from abnormally reduced spending that propels the economy into full recovery, Achuthan said.

"We're still looking at pent-up demand and really low prices," he said. "At the right price, consumers buy."

And inflation remains a looming concern. With the Treasury and Federal Reserve essentially printing U.S. currency and handing it to banks and overstretched lenders like Fannie Mae, there is always the chance that too many dollars chasing a fixed amount of goods will lead to higher prices. Inflation is at least as much based on perception of the future as conditions today, said Kevin Kleisen, an economist with the Federal Reserve Bank of Saint Louis and author of a recent report that suggests people should start thinking about the unthinkable.

Other signs indicate people are beginning to think about prices rising instead of falling. Yields on Treasury Inflation Protected Securities (TIPS) turned up in December after falling almost continuously since October 2008, suggesting investors no longer believe the consumer price index is going to fall in 2010. Perhaps more ominously, 30-year Treasury rates have risen from below 3% at the beginning of 2009 to a recent 4.6%, while 30-year mortgage rates have risen for four weeks straight and now are at about 5.3%.

Unfortunately this recession did so much damage to the economy that it will take several years to return to its former strength. And another pattern discourages full-throated enthusiasm for the future. Recessions are coming more frequently and recoveries have become steadily less robust--3% GDP growth instead of 5%--over the past 50 years, Achuthan said.

The handwringing over removing stimulus measures like the homebuyer tax credit underlie a bigger problem behind fueling recovery with government spending.

"Once you start messing with the the economy and start pulling this stuff out, it makes it harder to maintain the recovery," he said. "When you add volatility to low growth, the opportunity to go below zero grows exponentially."