The strength of the U.S. recovery depends on whether Barclays Capital Inc. economist Dean Maki or Decision Economics Inc.’s Allen Sinai is right about business investment translating into hiring.
Companies in July added 71,000 workers, down from this year’s high of 241,000 in April, the Labor Department said last week. That followed a 22 percent jump at an annual rate in corporate spending on equipment and software from April through June, the biggest increase since 1997, according to the Commerce Department.
“It’s been a very consistent pattern once capital expenditures turn, employment turns within the next several months,” said Maki, ranked the most-accurate forecaster of gross domestic product in a Bloomberg News survey in December. Sinai disagrees, saying that “businesses are going to take longer than ever before to let loose their cash to hire people.”
Their divergent views may explain why Federal Reserve Chairman Ben S. Bernanke, who convenes the policy-setting Federal Open Market Committee tomorrow, has called the economic outlook “unusually uncertain.” While stocks in July had their biggest jump in a year, job gains that were weaker than economists predicted raised concern companies aren’t hiring enough to give consumer spending a boost.
“We’ll see continued strong capital spending, but we’re not going to see it translate into jobs,” said Sinai, a former chief global economist at Lehman Brothers Holdings Inc. He argues that companies are relying more on technological advances than new workers to boost productivity.
Maki is the chief U.S. economist in New York for Barclays Capital, a unit of the Barclays Plc, the U.K.’s third-largest bank. He forecast private payrolls would increase by 125,000 in July and said past increases in capital spending are a harbinger of hiring.
The last time capital expenditures surged about 20 percent in two straight quarters -- as they did in the first half of this year -- was October 1994 through March 1995, and private payrolls rose by about 2 million jobs in the 12 months that followed, according to Labor Department figures.
So far, Sinai’s theory that job growth will be different in this recovery is proving more accurate, as reflected in the government’s Aug. 6 employment report.
Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., said that the jobless rate, which reached a three-decade low of 3.8 percent in April 2000, probably be no lower than 7 percent in this recovery. He spoke in a radio interview on “Bloomberg Surveillance” with Tom Keene.
Maki said concerns about sluggish job growth “are typically raised at this stage, when capital spending has surged but hiring hasn’t picked up yet. Those have proven unfounded in the past.”
Gross said he looks for investments in “quality” corporate and sovereign debt. “If you’re confident in the sovereign, if you’re confident in the corporation, then high-quality spread becomes almost as attractive as Treasuries at certain points on the yield curve,” he said.
Some firms are starting to add staff. Toyota Motor Corp., the world’s largest automaker, announced Aug. 6 it hired 1,000 more workers to build Tacoma pickups at a San Antonio factory and is using the plant’s full capacity for the first time.
The 131,000 decrease in overall employment followed a revised 221,000 drop in June, the Labor Department figures showed. More workers left the labor force last month, helping prevent an increase in the 9.5 percent unemployment rate.
The Census Bureau said it let go about 143,000 of the people conducting the decennial population count from mid-June to mid-July. It still had about 200,000 temporary workers on staff as of July 17, indicating additional cuts to come that will keep distorting the payroll figures for months.
For that reason, economists say private payrolls will be a better gauge of labor market health for much of 2010.
Wages were one bright spot in the Labor Department report. Hourly earnings climbed 0.2 percent in July from the prior month, more than anticipated. Employers also lengthened the average workweek by 6 minutes to 34.2 hours.
“Firms deferred investment for a long time and that is consistent with the capital-expenditure boom,” said Harvard University economist James Stock, a member of the Cambridge, Massachusetts-based National Bureau of Economic Research’s Business Cycle Dating Committee, the official arbiter of when recessions start and end.
“By the same token, average weekly hours are now almost at pre-recession levels, which is another indication that employment should be picking up in the near future,” he said. “So these considerations make me remain optimistic that output growth will be continued and will start to spill over into employment growth.”
The U.S. economy expanded at a 2.4 percent rate from April through June, slowing from the 3.7 percent pace in the first three months of the year, according to the Commerce Department.
Companies added workers at a faster pace earlier this year, boosting payrolls by 158,000 in March and 241,000 in April, according to Labor Department figures.
Manufacturing payrolls increased by 36,000 in July, reflecting a 21,000 rise in employment in the motor vehicle and parts industry, last week’s Labor Department report showed.
The Labor Department report intensified a debate among economists over whether the Fed will take an incremental step this week toward providing more stimulus.
U.S. central bankers said in June that more monetary stimulus “might become appropriate” if the economic outlook “were to worsen appreciably.” Bernanke said last month the Fed may at some point maintain stimulus by investing the proceeds from maturing bonds into U.S. Treasuries.
The economy, jobs and the budget deficit are likely to be top issues in November elections that will decide control of Congress. Heading into the campaign season, the Obama administration is facing public pessimism about the direction of the economy.
More than seven in 10 Americans say the economy is still mired in recession, and the country is conflicted over how to balance concerns over joblessness and the federal budget deficit, according to a Bloomberg National Poll.