The economy expanded at a sizzling 6% rate in the second half of 2003 but didn't generate any job growth. The December payroll number was a particular shocker -- just 1,000 net new jobs nationwide, with gains in October and November revised down. What's going on? Should we be worried?
Corporate profits are soaring, the stock market is strong, exports are picking up, capital spending is rising, and low interest rates and huge tax cuts -- $60 billion in tax refunds alone over the next few months -- should keep the economy growing at a healthy pace for much of 2004. So strong has the recovery been recently that pressure has been rising for the Federal Reserve to change policy and increase rates soon to head off inflation. Given the recent job numbers, though, it may be prudent for the Fed to wait and see.
With growth powering along, jobs will almost certainly be created. Yet the employment numbers are particularly confusing right now because the two major measures of job growth are diverging. The household employment survey, which includes the self-employed, has risen almost 2.3 million more than the payroll number in the past year. This is a difference of near-record proportions. Over the long run, however, the two employment measures generally track. So there is a good chance that a lot of jobs are being created and are just not being counted yet. It may all be a measurement error.
Or not. It could be that the jobs really aren't there yet and that the jobs rebound may take longer and be weaker than in the past. The labor market's performance in the second year of this recovery has been the weakest of any postwar rebound. Since the recession ended, the U.S. has gone 11 consecutive months with monthly payroll jumps failing to breach 100,000. That hasn't happened in 50 years. In the 25th month of most expansions, the economy usually generates 145,000 jobs -- not the 1,000 the Labor Dept.'s report says were created in December.
This whole business cycle has been different. It was led on the way up by a capital-spending boom that produced a telecom and high-tech bubble that burst. A long, shallow recovery followed, marked by war and business scandal. And throughout the ups and downs of the cycle, productivity grew robustly instead of falling, as it normally does in downturns.
It may well be that today, most CEOs, caught flat-footed by the tech and telecom busts, are still traumatized by the excesses of the '90s. They waited nearly two years after the recession's end, until the fourth quarter of 2003, to begin investing in tech again. They may be holding back on hiring as well. Relying on productivity gains and outsourcing to cut costs to boost earnings is a safe strategy. If CEOs can wring out more productivity, they may delay hiring far longer than in previous business cycles. Higher corporate spending on information technology and a stampede toward outsourcing to China and India suggest that they may be doing just that.
A deeper worry is that the jobs recovery is not just delayed but more difficult to achieve. The forces of higher productivity and globalization may now require the economy to grow faster, say, 5%, to generate the kind of job growth that in the past came from a 3% to 4% growth rate.
The truth is, no one knows. In the first part of this recovery, CEOs were constantly saying they had "no visibility" when it came to earnings. There are plenty of earnings now, but no visibility when it comes to jobs. Odds are jobs, too, will reappear in large numbers, perhaps later in 2004 than expected. But until the job fog clears, it would be foolish for the Fed to tighten. There's too much at stake.