Who Will Struggle in 2011

Rick Newman

For many Americans, the recession is finally over.

Economic growth in 2011 is likely to exceed 3 percent, and perhaps even hit 4 percent. That would be the best performance in more than a decade. Workers who held onto their jobs during the Great Recession can finally exhale, with growing confidence that their job security is improving. Companies are grudgingly starting to hire back a few of the unemployed. And the latest stimulus and tax-cut plan out of Washington will put cash into practically every taxpayer's pocket, just to make sure the economy keeps marching forward.

Yet the economic landscape in the aftermath of the Great Recession is littered with wreckage. Battered industries like construction and real estate won't return to normal for years. A few states, including California and Illinois, are nearly insolvent, with tax hikes and service cuts the only way out. Homeowners have lost trillions of dollars' worth of home equity, thanks to the housing bust. And the number of Americans who remain unemployed is far larger than at any time since the Great Depression.

For millions of Americans, in other words, 2011 won't feel like a recovery at all, but like the fourth year of a painfully long recession. Here's who is likely to feel it most:

The unemployed. It goes without saying that the jobless are America's have-nots, and they amount to an uncomfortably large group: More than 15 million people. The biggest economic question for 2011 is whether unemployment begins to fall consistently, or stays stuck at stratospheric levels. A true recovery won't occur unless more Americans have jobs and money to spend, so forcing unemployment down is in everybody's interest.

The unemployed got a break in the stimulus plan recently passed by Congress, which contains an extension of jobless benefits for the long-term unemployed that will last throughout 2011. But that could be a mixed blessing. Some of the jobless may be tempted to accept unemployment benefits instead of taking low-paying work, since it could add up more money. But prolonged joblessness can also be a pernicious situation that permanently pushes people into an underclass of labor-force dropouts. As unemployment drags on, it becomes much harder to find work down the road, since skills erode, contacts move on, and employers look askance at long periods of inactivity. On the other hand, many employers will be happy to hire jobless folks who show initiative and desire, especially as hiring picks up and the pool of available workers shrinks.

The undereducated. The value of education has never been clearer. The unemployment rate for people who never graduated high school is 15 percent--depression-level joblessness. For high-school grads with no college, unemployment is 10.4 percent, and for college grads it's just 4.9 percent. Unskilled or low-skilled jobs in manufacturing, construction, and other fields will return slowly, if at all, since many of them can be outsourced to other countries where labor costs are lower. That makes education the single-biggest determinant of career success.

Workers in shrinking industries. In the private sector, most of the big layoffs have abated, with many companies starting to rebuild slowly after three years of severe cutbacks. And a few industries, like healthcare and energy, never experienced much of a recession in the first place. But some industries are still stuck in the doldrums, with ongoing job cuts and an overall sense of gloom. Lower-end computer programmers, for instance, continue to lose jobs as companies outsource routine work to high-tech meccas like India. Traditional publishing and broadcasting are industries in permanent decline, as news, entertainment, and books go digital. And it could take a decade or more for all the jobs lost in construction and real-estate--once a vibrant part of the economy--to return. People with jobs in industries such as these will continue to find raises scarce and promotions hard to come by, since there's a glut of workers and shrinking opportunity. And people looking for jobs in these fields may come up empty for years.

Government employees. Government work used to be considered recession-proof. No more. For starters, President Obama has proposed a two-year pay freeze for federal workers, which won't stop all pay increases but would eliminate many cost-of-living raises. That may only be the beginning. Efforts to trim the federal budget will hit federal agencies sooner or later, with likely cutbacks in staffing, benefits, and maybe even pay.

Sharp cutbacks are already happening in many state and local governments. Fire and police departments, schools, and many agencies once thought off-limits have been squeezed as states and cities battle to close gaping budget deficits. The pain could spread in 2011, since federal stimulus money that buoyed local governments in 2009 and 2010 is running out. And a huge battle is brewing over benefits and pensions for public workers, which are underfunded in hundreds of municipalities. Coming up with the money, in many cases, will require tax increases--on voters who are struggling themselves and in no mood to sacrifice more to fund somebody else's retirement. That means life could get tougher for millions of government workers.

Drivers. Gas prices have been drifting upward to nearly $3 per gallon, from about $2.62 a year ago. And energy analysts expect them to stay there or go higher in 2011, thanks to oil prices that are approaching $100 per barrel. And that's happening in a fairly soft global economy that has curtailed demand for oil in many countries, which means there could be a price spike if growth turns out to be stronger than expected. Back in 2008, when pump prices topped $4 per gallon, drivers reacted by driving less and downsizing their wheels. But for many, the lesson was short-lived: Lower-mileage trucks and SUVs have been making a comeback, thanks partly to discounts designed to move slow-selling merchandise. That could make buyer's remorse a surprise theme of 2011.

Homeowners. Americans have lost about $9 trillion worth of household wealth since 2007, largely because of falling home values. The rout isn't over, unfortunately. Most forecasters think home values will decline another 5 to 10 percent in 2011, as high unemployment causes more foreclosures and a glut of homes pushes prices down. The good news, if there is any, is that the housing market may finally hit bottom in 2011, with home values stabilizing after five years of declines. That doesn't mean home prices will shoot up any time soon. But once buyers believe that prices have stopped falling, they'll be more inclined to buy, the first step back toward a healthy housing market. Stabilizing home values will also help owners do better financial planning, since they'll have a firm idea what their home is worth.

Spenders. A strong holiday shopping season suggests that the venerable American consumer is back in force--which would be a shame. Many consumers accustomed to impulse shopping and everyday conveniences are suffering "frugality fatigue," after three years of paying down debt and going without. So they're buying things that make them feel good. The satisfaction, however, may not last. The U.S. economy faces an austere and volatile future, since the U.S. government's massive debt--about $14 trillion--needs to be paid down sooner or later. The only way to do it will be to cut benefits and subsidies that millions rely on, and raise taxes, reducing take-home pay for most Americans.

Most likely, that will produce a slow-growing economy with relatively high unemployment. People with low expenses and a fat rainy-day fund will have the kind of flexibility necessary to adjust and get ahead. But those living on the edge--especially those with a lot of debt--could find themselves stuck in a hole they can't get out of. The next year or two may provide some breathing room to get ready for that. And by now, we ought to know that spending rarely paves a road to prosperity.


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