To be sure, President-elect Bill Clinton inherits a struggling economy. Despite recent stirrings in some of the data, the near-term outlook remains as uninspiring as ever. However, the new President also gets a good foundation for better times. Even without any nudge from policy, growth in 1993 is likely to end up moving a bit faster than it did in 1992.
Don't expect high gear, though. Structural barriers ranging from debt to defense to commercial real estate still block the way. But when the Bush Administration told the American people that the economy is getting better, it was basically right. The problem is that the improvement is dreadfully slow. Although economists can measure the progress, no one can feel it.
Real gross domestic product is going to grow about 2% this year, measured from fourth quarter to fourth quarter. That will be true even if the third quarter's 2.7% pace is revised downward, as expected, and the fourth-quarter advance is lackluster. Growth in 1991 was essentially nil.
However, all of the 1992 gain will come from higher productivity. That's why real gdp will grow this year, though employment is going nowhere, as the October job data illustrate. The good news is that faster productivity growth in 1992 is helping to lay the groundwork for better business conditions--and job prospects--in 1993.
CORPORATE FINANCES ARE ON THE MEND
Getting there will be the hard part. Corporate America is still overhauling itself at the expense of Household America. Restructuring and cost-cutting are boosting productivity and profits. But lost jobs and income are retarding consumers' efforts to shore up their finances. And until corporations solve their financial and competitiveness problems, they will not be ready to expand their output, payrolls, and facilities.
Companies already have made some progress, which puts them in a better position to start hiring again next year. Productivity in nonfarm industries rose at an annual rate of 2.6% in the third quarter. During the past year, output per hour is also up by 2.6%. That's an acceleration from 1.3% for all of 1991 and no growth in 1990 (chart). That speedup resulted partly from eight straight quarters of cutbacks in hours worked. And work time was slashed mainly through the outright elimination of jobs.
However, the gain in third-quarter productivity is a break from that trend. Last quarter was the first time in 212 years that work time has risen--a sign that the worst of the payroll slashing might be over.
This doesn't mean that companies are ready to hire just yet, but it might explain why new unemployment claims have tapered off in recent weeks. Claims, including those filed under the Emergency Unemployment Compensation Program, fell to 384,000 in the week ended Oct. 24. That was the lowest level in two years.
For now, the biggest payoff is on corporations' bottom lines. Because companies are boosting their production efficiency as they push down the growth rate of pay and benefits, unit labor costs have slowed dramatically. They rose at an annual rate mf only 1% in the third quarter, and during the past year they are up a mere 0.5%--the slowest annual pace in 812 years.
So, even though the weak economy has hurt pricing power, inflation is still running well above the pace of unit labor costs (chart). That's why profit margins are widening, and fatter margins are lifting earnings.
Profits are also improving because of low interest rates. Interest costs as a percentage of cash flow should continue to fall into next year, because interest rates should remain low, even in the event of a modest fiscal stimulus from the Clinton Administration.
That's because the inflation outlook is the best since the 1960s. The producer price index rose a scant 0.1% in October, and excluding food and energy, the core index fell 0.1%. Last month, the annual core rate of inflation for the ppi had fallen to only 1.8%, the slowest pace in the two decades of the Labor Dept.'s record-keeping.
A DEARTH OF `HELP WANTED' SIGNS
Although increased productivity, better profits, low interest rates, and declining inflation are the building blocks for better growth in 1993, progress will be slow. One reason: It will take time to put the labor markets back together again. Nonfarm payrolls rose by a slim 27,000 in October, but jobs fell by 72,000 in September.
Early retirements in the U.S. Postal Service plus the end of the federal summer-jobs program for teenagers caused some of the October weakness. Even excluding the government, payrolls rose by a modest 66,000 in October. Private employment has hardly budged in 112 years (chart). Factory workers have suffered the most. Manufacturing pared an additional 56,000 jobs last month, for a total of 278,000 lost so far this year.
The jobless rate edged lower last month, slipping to 7.4% from 7.5% in September. But that came from people leaving the labor force, presumably because they don't think any jobs are available. That's a far cry from past recoveries, when the hope of work brought people out pounding the pavement.
The drive to improve profit margins means that companies are hesitant to hire new people, particularly when part-time help is cheaper. The number of nonfarm workers who could only find part-time jobs rose by 109,000 in October, to 6.2 million, and is up by 364,000 since June.
Corporate bottom lines benefit from part-time workers in two ways. Companies can quickly adjust payrolls to fit swings in demand. And businesses usually do not pay for benefits for part-timers. Benefits are rising at a much faster pace than wages.
WORKING LONGER, MAKING A BIT MORE
Indeed, nonfarm pay is growing at a snail's pace. Hourly wages rose a small 0.2% in October, to $10.65. Yearly wage growth stood at 2.4% in October, down from the 3% pace of a year ago (chart).
A longer workweek has given consumer incomes some relief from slower wage gains, though. The factory workweek rose to 41.1 hours in October, not far below its 26-year high of 41.3 hours set in May. The increase means that industrial production probably edged higher last month despite the broad cuts in jobs.
Employees elsewhere also put in longer shifts. The nonfarm workweek increased by 12 minutes, to 34.5 hours, in October. Longer work time, combined with the small gain in hourly pay, lifted weekly pay by a healthy 0.8%. That reversed a 1.1% drop in pay in September and suggests that total personal income rose in October.
If weekly pay continues to post modest gains in coming months, rising incomes may give some cheer to retailers who are worried about the holiday shopping season. Healthy retail sales at yearend could lead to a pickup in orders, production, and jobs in early 1993.
Christmas shopping, though, will depend heavily on what cash consumers have in their wallets. That's because households are still keeping their credit cards at home. Installment debt rose $1.6 billion in September, but that was the first advance since January.
By using credit sparingly, households have pared their level of installment debt outstanding to 16.2% of their disposable income--the lowest rate in seven years. But less borrowing means that income growth will be the key determinant of future gains in consumer spending.
Therein lies the recovery's near-term problem, which will make the path to a better 1993 feel pretty bumpy. Economic growth based solely on improved productivity--with no accompanying job growth--will not allow consumer incomes to grow fast enough to keep demand marching forward.
And businesses that focus on lowering labor costs and improving profit margins at the expense of jobs ignore a crucial rule in this consumer-driven economy: Cutbacks in one company's payrolls mean fewer customers for everyone else.