What sort of economic recovery is this anyway? Readers of our quarterly investment memos know that we have been enthusiastic about the prospects for the stock market for nearly a year now. That’s because history teaches that equities markets usually thrive when the economy rebounds from one of its periodic cyclical downturns. But beyond the strong recovery in the profits of big companies—up about 20 percent in 2003 (although still well below pre-recession levels)—one might fairly ask if this recovery is just a Wall Street fantasy or a politician’s deception.

The strange nature of the recovery has been widely reported, and exhibit number one is the absence of job growth. In a typical recovery, the economy by now would have added 2 or 3 million jobs, but the government statistics that Federal Reserve Chairman Alan Greenspan says are most reliable report that employment only really began to grow in the last six months or so. The tally comes to just a few hundred thousand. Well, is this at least a normal recovery for those already employed? Hardly. Wage advances have followed an identical pattern. Despite booming productivity, rebounding profits, and 4.3 percent GDP growth, wages edged forward just 1 percent after inflation in 2003. For the two years of so-called recovery they are about flat. That compares to a 9 percent average rise in prior recoveries. Thus, the trend in wages only confirms the picture of a stunted recovery.

What should we make of this picture of an “investors only,” jobless recovery? In some ways the situation is better than it looks, especially when viewed over the long haul. The recent failure of the U.S. economy to create jobs may prove but a brief setback in an extraordinary 20-plus year job creation boom. Over that period, U.S. jobs grew by 37 percent while population grew just 24 percent. One key statistic, the share of working age population employed, is now about 62 percent, only two points from the peak figure reached in 2000, and well ahead of the 59 percent level achieved prior to the recessions of the early 1980s. Even today’s unemployment rate of 5.6 percent, while up sharply from the 4 percent level at the economy’s peak in early 2000, remains low compared to other industrialized economies and far below the figures of previous recessions. And, all in all, the 2000-2001 recession eliminated fewer jobs relative to the size of the work force than past downturns.

But the secular trends should not provide too much comfort. While in some respects cyclical, the recent rise in the unemployment rate actually hides some disturbing developments. The first is that unemployment figures surely understate the distress among families and the malaise in the economy. Not counted among the unemployed are those 5 million working age Americans who have dropped out of the labor force in the past three years. We can be fairly certain that most of these did not do so willingly. They include sharply increasing numbers of persons collecting Social Security disability checks, a rising trend dating back to the 1980s. If we add the rise in these recipients over the last ten years to the reported unemployment rate, it would push the figure nearly one percentage point higher. Sadly, our booming prison population also perversely keeps the unemployment rate from looking worse. If we took the increase in inmates over the past ten years and added that population to the job-seekers’ rolls, it would increase the unemployment rate by about 0.4 percent.

Perhaps most telling, the total share of the prime work age population, those between the ages of 25 and 54, who are either working or looking for work has slipped below 83 percent for the first time since the 1980s. Indeed, labor force participation is down among virtually every demographic group reported by the Bureau of Labor Statistics with one disturbing exception: those over 55. Since the recession began, labor force participation among older persons has risen three percentage points to 36 percent. We can assume that much of this rise stems from people forced to return to work because of disappointing pension benefits, rising healthcare costs, or low interest rates that have depleted income from their savings.

So where should we focus our attention, on the long-term trend in job growth or these disturbing, but generally more recent, developments? At the very least, the evidence suggests that the American economy faces extraordinary challenges in creating jobs over the coming years. The very dynamism that has contributed to our prosperityand especially stock market wealth—guarantees these challenges. When we look at the growth or loss of total jobs alone, we miss the two components underlying the equation: jobs created and jobs lost. The size of these two figures is breathtaking. In a typical month well over three million U.S. workers lose or voluntarily leave their employment, while, in normal times, a similar number of workers are hired. The rising productivity that is the lifeblood of economic progress only speeds this process, making any mismatch between job creation and destruction ever more painful. And with technological advances, especially the spread of high-speed global communications, the premium that will be placed on the newest skills and the most flexible workers-whether located domestically or abroad-is sure to be ever higher. Those workers cast aside by these changes will suffer joblessness or low wages. Even if total employment once again begins to rise, we are likely to see the pace of job destruction gain, the persistence of unemployment for those unable to adapt increase (the average period of unemployment for the jobless is today almost 20 weeks, near a 25 year high), and the sense that this economic recovery is mostly for shareholders instead of workers become more pervasive.

These trends may well be inexorable. What we do about them is something else. Government actions in the form of tax policy, or education and welfare reform can be used to slow these trends or ameliorate their impact. Progressive companies might improve their own prospects by smoothing the transition for their workers. Or, we can accept the standard free market nostrum that the market will sort it all out. With the presidential and congressional elections this fall, there should be no shortage of opportunity to debate the issue. And politicians will have the chance to prove that they understand that this Wall Street recovery has little bearing on the long-term jobs issues facing the U.S. economy.  —B.Apfel