THIS PUZZLE IS MISSING JUST ONE BIG PIECE: JOBS
The economy has been sputtering during the past year because one key piston keeps misfiring. That's job growth, and a recovery cannot keep moving forward under its own power without it. The latest data show that housing, exports, and especially consumer spending were pumping hard in the first quarter. Now, there are some hints that the labor markets are getting ready to kick in.
When the Commerce Dept. reports on first-quarter gross domestic product on Apr. 28, real GDP will show a healthy combination of strong growth in demand and a sharp drawdown of inventories. That mix bodes well for output gains in the second quarter. But unless companies start beefing up their payrolls, the lack of sufficient income growth will prevent the economy's gains in the first half from carrying over into the second.
Some initial signs look good. In the first week in April, new jobless claims fell by 18,000, to an annual rate of 415,000, following a 23,000 drop the week before. The two-week decline was the largest in a year, and it pushed claims to the lowest level since October.
The four-week average of claims, which is less volatile and thus a more reliable gauge, is also headed lower (chart). The declining trend could be an early signal of fatter payrolls when the government reports on April employment growth on May 8.
New claims greater than 400,000 per week still suggest a sluggish economy, but the recent decline may well continue. Companies profess dramatically improved hiring intentions for 1992, buoyed by their growing optimism about the economy, according to Dun & Bradstreet Corp.'s annual employment survey of 5,000 companies.
Although companies with more than 25,000 workers plan to cut jobs, small operations that employ fewer than 100 workers will more than offset those losses, says D&B, for a total gain of 1.9 million new jobs.
These plans are consistent with the increasingly upbeat mood of small businesses as measured by the National Federation of Independent Business. The NFIB's index of small-business optimism about the future rose in the first quarter, to the highest reading in a year. That gain takes the index back to its pre-recession level.
Of course, these are only expectations. Last year at this time, amid postwar euphoria, companies told D&B that they planned to add 850,000 workers in 1991. But the recovery fizzled, and employment actually fell. This time, though, the economy's fundamental supports are much stronger--and more capable of generating the job growth that a lasting upturn needs.
The housing recovery remains a pillar of strength. In March, it was like the U.S. Postal Service: Not snow nor rain nor gloom of higher interest rates stayed homebuilders from their rebound. The month's late-winter storms in the northern half of the country led to forecasts of a decline in residential construction. Instead, housing starts jumped 6.4%, to an annual rate of 1.37 million (chart). That was the fourth consecutive gain, which lifted starts to their highest level in two years.
The March advance was also a bit surprising because mortgage rates had inched above 9% by midmonth. That probably worked to the advantage of builders, though, because some buyers may have signed construction contracts on fears of further interest-rate increases.
The housing rebound--now 14 months old--may take a breather in April, however. Starts of multifamily buildings soared in March, accounting for all of the month's gain. The jump was probably a fluke because the apartment sector is suffering from a glut of existing units.
Starts of single-family homes, which dropped 2.7% in March, may take up some of the expected slack in multi-unit construction in April. Mortgage rates slipped to a national average of 8.79% in the week of Apr. 17, according to HSH Associates, and cheaper mortgages will make home buying affordable for more consumers.
Looking further ahead, builders are generally optimistic, although the April reading on their future expectations did show a twinge ef caution. The National Association of Home Builders reports that the percentage of builders who expect good sales over the next six months fell to 40% last month, from 42% in March. But that's still relatively high, and buyer traffic was down only a bit from March's busy level.
Of course, builders are not the only ones to gain from the housing recovery. Makers of home-related goods, from carpeting to microwaves to hardware, are also reaping the benefits. Indeed, the 26.4% annual rate of rise in the combined sales of furniture and building-material stores was a driving force behind the jump in retail sales in the first quarter. As long as the housing industry remains buoyant, retailers and manufacturers of home-related goods will also be busy.
The risks to the housing rebound remain the outlooks for jobs and interest rates. The D&B forecast of snappier job growth this year should provide support for housing demand. But the jitters in the bond market, which have pushed the yield of 30-year Treasury bonds back above 8%, could slow some of homebuilding's momentum.
One big worry for bond traders remains the massive borrowing needs of the U.S. government, which will hit the market at the same time as the financing needs of the recovery begin to pick up. The Treasury Dept. said that the budget was in deficit in March by $49.4 billion, up from $41.2 billion in March of last year. That brings the red ink for the first half of the fiscal year to $196.9 billion, up 29% from last year's first half. Through March, outlays were accelerating--perhaps via some election-year pump-priming--and receipts were growing at a snail's pace (chart).
The good news is that the deficit for the full 1992 fiscal year now seems likely to end up less horrendous than the $375 billion to $400 billion most analysts had expected. In fact, it could end up below $350 billion--though that's still far above 1991's $268.7 billion.
That's partly the result of a slowdown in Resolution Trust Corp. spending on the thrift-industry bailout--not because the problem is going away, mind you, but because the RTC has chosen to slog more slowly through the mess. So far in the first half of fiscal 1992, RTC outlays are far behind last year's pace, and they will fall well short of the anticipated $80 billion. The benefit, temporary as it may be, could be less pressure on the credit markets--and on long-term interest rates--this summer, when Treasury borrowing is expected to swell.
That other deficit--the one in merchandise trade--is more supportive of the recovery. Exports jumped 6.8% in February, to $37.8 billion, the largest monthly gain in more than a year. And imports dipped 0.4%, to $41.2 billion. As a result, the February trade gap shrank to $3.4 billion, the smallest in nine years.
The February performance means that foreign trade was a plus for real GDP growth last quarter, a further lift to final demand in addition to housing and consumer spending. The three-month average of the trade deficit shows the recent trend of improvement (chart).
However, the trade deficit will not continue to improve at February's pace. Exports of aircraft surged 44% in February, accounting for a big chunk of the export gain. Also, weak economies in Europe and Japan will stunt the growth of U.S. shipments.
Still, developing nations in Latin America and the newly industrialized countries in Asia are taking up some of the export slack. Since exports now account for about 20% of U.S. industrial production, factory output and employment will benefit enormously when Europe and Japan finally shake off their troubles.
In the meantime, faster job growth is imperative for the U.S. to assume its traditional role as the engine of world growth. A U.S. recovery will lift other countries--and in the process maintain the export gains that will provide even more fuel to keep the economy humming.JAMES C. COOPER AND KATHLEEN MADIGAN