THE JOB NUMBERS ARE PUTTING SOME KICK IN THE ECONOMY
The solid report on the labor markets in July says that economic growth in the second half is shaping up to be a lot livelier than it was in the first half. It also raises a key question: Did the economy really grow at an annual rate of only 1.2% in the first half?
The comparatively strong performance of the labor markets so far this year suggests otherwise. Despite the piddling pace of output, employers have added 1.2 million workers to their payrolls through July (chart). Total work time has climbed at an annual rate of 3.3%, and the unemployment rate, down to 6.8% in July, has fallen to the lowest level in nearly two years. All this seems inconsistent with such a poor showing from real gross domestic product. Supercautious companies would hardly add so many workers if conditions were really that bad.
A good reason to believe the job data instead of the GDP numbers is the recent surge in new business formations. In the second quarter, the Commerce Dept.'s index of new incorporations minus failures jumped 3.4% above its fourth-quarter level, yielding the most net new businesses in three years. Following a steep drop during the 1990-91 recession, startups floundered for a year, but in just the past two quarters, more than half of those losses have been recouped. That explains why job creation has been so healthy, despite all the headline-hyped corporate layoffs.
The divergence between the paces of real GDP and hours worked suggests that productivity growth in the first half was dismal, and indeed that's just the way the Labor Dept. reported it on Aug 10. However, the Commerce Dept.'s annual rewrite of history--its benchmark GDP revisions--are due on Aug. 31. Don't be surprised if both GDP and productivity end up looking a bit better.
But that's all history. Looking toward the second half, the July pace of employment growth is consistent with another 1 million new jobs, in addition to the million slots created in the first half. U.S. industry added 162,000 workers last month, and job gains in both May and June were revised up slightly.
The growth in July payrolls was also fairly broad. Some 56% of the 356 industries surveyed by the Labor Dept. expanded their work rolls. Among goods producers, a gain of 24,000 construction jobs more than offset a small 13,000 decline in manufacturing employment.
More construction jobs are on the way this summer, as housing continues to perk up in response to low interest rates and better job growth. Mortgage applications to buy a home rose sharply throughout July and ended the month at a record level, according to the latest reading from the Mortgage Bankers Association of America.
As in recent months, service-producing industries, which took on 153,000 more workers, accounted for nearly all of July's job gains. Retail trade, especially restaurants, along with temporary-help agencies and health services, continued to be big gainers.
With job growth refusing to knuckle under, despite continued layoff announcements, job worries among consumers may well start to taper off, giving some buoyancy to the various measures of consumer attitudes. Already, some July readings have perked up a bit.
Moreover, now that President Clinton's budget plan is finalized, some of the uncertainty hanging over households and businesses will be lifted. All this bodes well for second-half consumer spending.
Also, households apparently are feeling more secure about financing those purchases with credit (chart). The volume of consumer installment debt soared by $7.7 billion in June. Excluding the month when the Federal Reserve Board broadened its coverage of the data, that was the largest monthly increase in six years.
The July job gains suggest that income growth will support that added volume of debt and a continued solid pace of spending. Average weekly earnings rose 0.5% last month, to $373.29. Add to that the month's job growth, and it's a good bet that July personal income scored a hearty gain.
Installment debt as a percentage of aftertax income stood at 16.4% in June, up only slightly from May, but far below the peak of nearly 19% hit four years ago. Moreover, the cost of servicing that debt has fallen dramatically, especially in light of this year's steep decline in long-term interest rates (page 20).
To be sure, average monthly job growth of nearly 170,000 through July is well below the typical pace for this stage of an expansion, and many of the new positions offer skimpy pay, benefits, and security. However, in terms of the outlook, more jobs are always better than fewer. The evidence: Another anomaly in the poor first-half GDP showing was that consumer spending rose at an annual rate of 2.3%--twice the pace of GDP.
Clearly, the biggest drag on employment growth remains manufacturing. July's job loss dropped factory payrolls to the lowest level since 1965. Defense cuts at home and recessions in Europe and Japan are the biggest drags, but another is corporate restructuring, which is much more intense among manufacturing companies than service businesses. As a result, the unemployment rate in manufacturing still hangs high, while joblessness in services continues to push lower (chart).
Despite all the layoffs, manufacturing output continues to muddle along in fits and starts. July might be one of the starts. The factory workweek jumped by 12 minutes last month, to 41.4 hours. The workweek had slipped in May and June but now is back near the 26-year high reached in April. That bodes well for July industrial production.
The split between gains in manufacturing and service employment explains the recent wide divergence in productivity growth in the two sectors. The Labor Dept. reported that output per hour in U.S. industry fell at an annual rate of 2.5% in the second quarter, following a 1.6% drop in the first quarter. Those were the first back-to-back declines in productivity since the recession.
However, the service sector more than accounted for all of the weakness, which could prove to be short-lived if
economic growth picks up in the second half, as appears likely. In sharp contrast, output per hour in manufacturing soared at a 5.2% annual rate last quarter, following an equally impressive 4.9% advance in the first quarter.
Those gains are simply a continuation of the four-year trend of accelerating productivity gains in manufacturing. Factory productivity is up 5.2% from a year ago, the strongest annual performance in 51 2 years (chart).
The key result: U.S. manufacturers are becoming some of the most competitive producers in the industrialized world. Because the pace of factory pay and benefits--up 3.8% from a year ago--remains well below the growth rate of productivity, unit labor costs in manufacturing have declined for six consecutive quarters. Once Japan and Europe get their economies turned around, the factory sector will be in a position to become an export powerhouse by 1994.
For the rest of 1993, if job growth equals the first-half pace, better economic growth seems assured. Over yearly stretches, real GDP tends to grow faster than overall hours worked, with productivity gains accounting for the difference. But just the opposite occurred in the first half. If hours worked in the second half match the 3% growth pace of the first half, it's a good bet that real GDP will grow in excess of 3%.
That would be good news for President Clinton, who needs a sturdy economy to absorb his new round of tax hikes and spending cuts. Moreover, in addition to tackling the federal deficit, Clinton is well on his way to delivering on another key campaign promise--to create 8 million new jobs by the end of his first term. Judging by the July job report, he's likely to be a quarter of the way there by the end of the year.JAMES C. COOPER AND KATHLEEN MADIGAN