Downbeat Job Numbers Will Keep The Economy Playing The Bluesby
Economists are trying to set their sights on a recovery, but the data keep getting in the way. Just when optimism over a peace rebound this spring began to swell, the February employment report came along. It was much weaker than most analysts were expecting. The labor markets suggest that any postwar boost in the economy is likely to be small and temporary.
Of course, almost all of the economic data still precede the end of the gulf war. Consumer spending seems likely to improve a bit as peace boosts confidence, but the downbeat job numbers imply that the underpinnings for a lasting recovery are not yet in place and that the economy may not hit bottom until much later in the year.
Consumers' pockets seemed a bit looser in February. Retail sales rose 0.8%, but a big downward revision to January purchases dulled some of the luster of that gain. January buying, originally reported as down 0.9%, now shows a 1.4% drop.
The sales numbers will be changed again when the Commerce Dept. releases its annual revisions in the week of Mar. 18, but for now, the February gain looks like little more than a blip in a steep downtrend. Sales had fallen below their year-ago level in January, something not seen in 30 years, and they remained below last year's pace in February. Prior to last month, real retail sales had fallen for six consecutive months (chart).
An increase in car buying accounted for three-fourths of the February gain. But after plunging in January to the lowest level in nearly nine years, car sales rose from dismal to merely poor. Department-store receipts and sales of home-related goods posted solid increases last month, perhaps boosted by the relatively mild weather or by perceptions that the war would be over soon.
PAYROLLS ARE STILL SHRINKING
While peace will lift households' spirits, the sharp rise in February's unemployment rate is likely to dampen them. The jobless rate jumped from 6.2% in January, to 6.5%--the highest in four years. Moreover, weekly claims for state unemployment benefits surged to an annual rate of 508,000 in late February. That was the highest filing pace in eight years, and it occurred in a holiday week, during which claims tend to fall. All this suggests that the jobless rate will rise again in March.
In addition, the continuing shrinkage of payrolls means that consumer incomes are still falling. Nonfarm industries cut 184,000 jobs from their payrolls in February, bringing the total losses to more than 1.2 million since employment peaked in June. These recent losses are on a par with those in the early months of the severe 1981-82 recession, and they represent a serious erosion of purchasing power that will take time to restore.
The weakness in the labor markets is not confined to the top-line numbers. The February job losses were smaller than the 233,000 decline in January, but they were broader. Only 39.7% of the 356 industries surveyed added jobs in February, down from 41.2% the month before, and from 58.6% a year earlier. Also, the number of people who are working part-time because they cannot find full-time work has soared by more than 1 million since July, to 5.8 million in February.
Workers did spend a little more time on the job in February. The average workweek in the nonfarm sector edged up to 34.3 hours, from 34.1 in January. But the average work time for both months was below the pace of the fourth quarter. The decline in nonfarm jobs and a shorter workweek mean that the total number of hours worked so far in this quarter is dropping as steeply as it did in the fourth quarter (chart). This suggests that real gross national product this quarter could fall by at least as much as the 2% drop posted last quarter.
THE FED MAY DELAY FURTHER EASING
The Federal Reserve Board clearly said--by its actions--that the job numbers were inconsistent with economic recovery. A few hours after the release of the report, the Fed nudged short-term interest rates down. And on Mar. 13, Fed Chairman Alan Greenspan confirmed that the central bank had cut the federal funds rate--the cost of funds traded between banks--by a quarter of a percentage point, to 6%.
The decision to ease monetary policy did not appear unanimous, however, and the latest report on the economy from the 12 Fed districts contained signs that the rate of economic decline may be slowing. All this suggests that further rate cuts may be put on hold until the central bank can assess the impact of past easing moves.
That speculation seems to have halted the decline in long-term interest rates. The yield on 30-year Treasury bonds, now at about 8.3%, isn't much lower than the 8.5% average during the second half of last year. In addition to better income growth, lower long-term rates are imperative for a meaningful turnaround in the demand for houses and cars, a crucial ingredient in any recovery.
FACTORIES HAND MUT LOTS OF PINK SLIPS
Just ask companies in construction and manufacturing. Those interest-sensitive industries have taken the biggest hits in the recession, reflecting the slump in homebuilding and business construction, and weak demand for big-ticket goods by businesses and consumers.
Factories laid off 127,000 workers in February, on top of the 932,000 let go since early 1989. Those pink slips raised the jobless rate in manufacturing to 7.4% in February, a percentage point above January's rate and more than 2.5 points higher than where it was two years ago.
Last month's job losses in manufacturing, coupled with a small decline in the workweek to 40.2 hours, mean that industrial production weakened further in February. In particular, continued layoffs of auto workers and a drop of almost an hour in the workweek suggest that auto output was down extensively last month.
Detroit is responding to the recessionary pace of new-car sales. January and February sales of domestically made cars were 10.4% below the pace of the fourth quarter. And in early March, after the war's end, buying posted an annual sales rate of only 5.9 million.
Auto makers have announced further cuts in their second-quarter output schedules that will drop production 14% below its year-ago level. This downshifting argues against a spring economic recovery, since autos account for a significant share of consumer spending and factory output. The importance grows when supplier industries such as steel and glass are included.
The service sector is also straining. Excluding government hiring, service payrolls fell by 110,000 in February. The bulk was in the retail sector. But except for health care, other industries reported losses as well. And with more service companies heading for bankruptcy court or facing sharply lower profits, service payrolls will be slashed further before this recession is over.
That means continuing downward pressure on wage growth, but a brighter outlook for inflation. Wages in the nonfarm sector were unchanged in February at $10.20 per hour and are on track to rise by just 3.3% this quarter (chart). That would be the smallest gain in three years. The wage slowdown is concentrated in services. Pay is up just 3.8% in the past year, compared with the expansion's 4.8% peak, reached in December, 1989.
Growth in manufacturing wages has picked up in recent months, although their yearly pace remains below that of service wages. However, the acceleration is not so troublesome to the inflation outlook because it is being covered by strong gains in factory productivity. Meanwhile, the slowdown in service pay helps to lower the floor under service inflation. That's crucial to improving the overall inflation outlook because price increases in services have moderated little.
On the downside, February's smaller wage hike, together with last month's job losses and only a slightly longer workweek, mean that personal income didn't rise by much in February. After inflation, it may not have increased at all. That means consumers are hurting.
To be sure, economists believe that a recovery is out there--somewhere. According to a survey of forecasters by the National Association of Business Economists, 22% expect the recession to end in the current quarter, 51% look for a trough next quarter, and 18% don't see the economy bottoming out until the third quarter. Judging by the February employment report, though, hopes for an early recovery may be just wishful thinking.