The policy deadlock in Washington is contributing to a far more serious kind of inertia in the jobs market.
As the results of November's midterm elections exacerbated the partisan standoff in Washington, hiring in the United States slowed to a crawl even though indicators suggested the economy was improving.
The Nov. 2 vote handed control of the House of Representatives to the Republicans, leaving them little incentive to compromise with the Democrats, who still technically control Congress until the end of the year. So far, President Barack Obama has refused to fully embrace Republican demands, robbing businesses of clarity on the taxes they will be forced to pay in 2011 or the regulations to which they will be required to comply.
"There are lots of stories going around that people think the folks in Washington aren't up to the job of fixing things," said Karen Dynan, co-director of the Economic Studies program at the Brookings Institution, a think tank based in the U.S. capital. "It's hard for banks to go forward when they don't know what financial regulations are going to be. It's hard for businesses to go forward when they don't know the taxes they are going to pay."
Employment in the U.S. increased by 39,000 last month, far less than what most Wall Street economists were expecting, and the unemployment rate rose to 9.8 per cent, the first increase since July and the highest since August, the Labour Department reported Friday. Shortly after the latest jobs report was released, Republican and Democratic lawmakers on Mr. Obama's deficit commission rejected the chairmen's final report, preventing the plan from being submitted for a vote in Congress.
The report, based on about 10 months of work by an 18-member committee equally split between Democrats and Republicans, recommended spending cuts and tax increases that would cut the U.S.'s record deficit by a projected $4-trillion (U.S.) over the next decade.
"Please, I really am pleading with you, make the tough choices," Erskine Bowles, one of the co-chairmen, implored the lawmakers on the commission as he adjourned the group's final meeting.
The Standard & Poor's 500 Index retreated from a two-day rally after the jobs report provided investors with what Capital Economics analyst Paul Dales called "a painful reality check." The index rebounded toward the end of trading, ending the day marginally higher.
Other recent indictors, including sharp increases in pending home and automobile sales reported this week, suggested the U.S. economy was finally coming out of a summer-long funk.
The dollar was rising this week for the first time in a long time because the American economy was looking like a safer bet compared with Europe, where sovereign debt yields have risen to record levels amid fear that deficits in countries such as Portugal and Spain have grown too wide to allow governments to make interest payments on their debts.
In another report Friday, the Institute for Supply Management said its index of business activity by services companies, which make up about 90 per cent of U.S. GDP, rose to the highest level in six months in November, a solid indication that the economy is improving.
Yet that wasn't enough to prompt widespread hiring. A measure of unemployment that includes part-time workers who would like full-time jobs was unchanged at 17 per cent last month from October, a rate that is only marginally lower than the 17.2 per cent rate of a year earlier. Some 15.1 million people were unemployed in November, a figure that's equivalent to almost half of Canada's population.
The weak employment figures argue in favour of the Federal Reserve's controversial decision last month to create $600-billion to buy longer-term Treasuries to keep downward pressure on interest rates.
But as analysts looked for explanations for why companies are so unwilling to hire even though profits are strong, many concluded that a significant problem is political and policy uncertainty. Stéfane Marion, chief economist at National Bank Financial in Montreal, said his U.S. clients tell him that the reason they are holding back on hiring is because they have no idea whether hundreds of billions worth of tax cuts will lapse on schedule at the end of the year or be extended.
"The conditions are in place for a rebound," said Mr. Marion, who studied the U.S. labour market as an analyst at Canada's Finance Department. "The uncertainty, for me, is a big deal."
Representatives from the Obama administration, including Treasury Secretary Tim Geithner, and the Democratic and Republican caucuses in Congress are negotiating a compromise that could extend income-tax cuts made by George W. Bush at least temporarily. The White House is opposed to extending lower rates for richer households, but might compromise if Republicans back an extension of unemployment benefits.
The Washington Post reported Friday that an agreement appeared possible. But any compromise will be tested by the political reality that it is in Republicans' interest to delay. The weakness of the November jobs data may prove a galvanizing force - the only positive in another wise grim assessment of the economy, Mr. Marion said. "The silver lining is that it could expedite things in Washington," he said.