Recovery Room Report: The Patient Is Still Feeling Weakby
This is a recovery that only economists can appreciate. The number jockeys can show it to you in the data, but that doesn't mean you can feel it.
The August employment report is a case in point. Since April, payrolls have risen by 110,000 workers (chart). But that's the slowest start in any of the five previous upturns, when average job growth in the first four months of recovery was more than four times as fast. Those were gains you could feel as well as see.
In terms of gross national product, the third quarter looks encouraging. Rising factory production will slow the inventory liquidation that has been going on since the end of last year: a plus for GNP. Also, consumer spending began the quarter at a high level, which will give GNP another kick.
The loud message from the job markets, however, is that sustained growth in consumer spending and factory production is no sure thing. Job growth is barely sufficient to support the pace of income and spending necessary to guarantee the recovery's survival. Incomes are already stretched thin, as consumers try to pay off burdensome debts and replenish their skimpy savings.
And until more businesses feel the recovery, they will be unwilling to help the economy along by boosting their investment in new buildings and equipment. Indeed, the government's latest survey of capital-spending plans shows that companies are cutting back on their second-half outlays. The survey was done in July and August, when the upturn was supposedly well under way.
FINDING A JOB IS UPHILL WORK
The August job numbers highlight a big reason why the recovery remains so ethereal. Excluding the small but robust health care industry, there has been no recovery in service employment. That's important, because service producers employ 78% of all nonfarm workers, and they generate 74% of all wages and salaries. Jobs in services other than health care fell in August to the lowest level since January, 1990.
Because of the drag from services, nonfarm jobs rose a mere 34,000 in August, after declining by 73,000 in July. Manufacturers posted the third increase in payrolls in the past four months. Construction employment, however, fell for the third consecutive month, partly reflecting the shaky housing recovery.
Service producers put on 10,000 more workers last month, but without the 36,000 increase in health care, service employment dropped by 26,000. Retailing, wholesaling, and government accounted for most of the losses.
Service jobs exploded during the 1980s, but demand growth in many service industries has now cooled off, turning those huge labor pools into costly burdens. Services from advertising to finance are restructuring their operations in an effort to cut costs and improve profits as pricing power weakens in a low-inflation environment.
That restructuring even includes state and local governments, which are beset by budget problems. State and local agencies shed 40,000 workers in August, on top of a 61,000 cut in payrolls in July. More job cuts are already in the works, and they will be a drain on overall employment and earnings in coming months.
The job picture in manufacturing looks brighter. The factory sector is where the recovery has been the most evident--at least in the data. Factories added 42,000 new hires in August, following a 25,000 increase in July. In addition, the factory workweek increased by 12 minutes, to 40.9 hours, and overtime gained 6 minutes, to 3.8 hours. More jobs and work time virtually assure that industrial production posted a fifth consecutive advance in August (chart).
But the foundations of the manufacturing rebound are starting to wobble a little. Production got a boost from the spring recoveries in housing and autos, but home demand retreated in July, and car sales fell in August.
The most encouraging aspect of the August job report was the continued absence of any worrisome pressures on inflation. Average hourly earnings rose 0.4% last month, but they had fallen by 0.1% in July. In the past year, hourly pay has risen just 3.3%. That's down from nearly 4% during the previous year, a sign that wage gains will not be fueling price hikes.
CONSUMERS STRUGGLE TO DIG OUT OF DEBT
The August increases in hourly pay and work time do point to a gain in personal income for the month. But it's not clear how much of that money will go to extra spending, because households are in a deep debt hole. And right now, they are more interested in climbing out than getting further in.
In July, consumer installment credit fell by $838 million, its eighth drop in the past 10 months. Debt outstanding is now 0.4% below its year-ago level (chart). That kind of drop hasn't happened since the stringent credit controls of the early 1980s. A sharp decline in auto loans is leading the retreat, and consumers are also cutting back on revolving credit, mostly credit cards.
Meager gains in personal income over the past year aren't helping debt-laden households. And lenders are feeling some of the pinch. The Mortgage Bankers Assn. (MBA) reports a rise in mortgages that are delinquent for 30 days or more. In the second quarter, 5.28% of mortgages were past due, up from 4.95% in the first period. The second-quarter rate was the highest since 1986. Consequently, banks are scrutinizing consumer loans more closely.
Since rising delinquencies usually lag behind the end of a recession, the rate may go higher. The MBA says the rate of loans that are overdue for at least 90 days is also rising, a harbinger of more outright defaults.
Since households are apt to pay the mortgage before other bills, rising delinquencies reflect the problems of weak consumer fundamentals: slow income growth, dubious job prospects, and a thin cushion of savings.
CAPITAL PROJECTS ARE ON HOLD
In such an uncertain climate for consumer demand, businesses are hesitant to shell out for new buildings and equipment. According to the Commerce Dept.'s summer survey, businesses expect to raise their capital spending by only 0.5% this year, to $535.1 billion. That's a sharp drop from the 2.7% gain projected in the survey done in April and May. Outlays rose by 5% in 1990.
The survey says that all the gains are yet to come. Spending in the first half was unchanged from the second half of 1990, but outlays in the second half of 1991 are slated to grow at an annual rate of 3.9%. The new second-half plans, however, are more than $14 billion below the projection in the previous survey.
And there is plenty of doubt that even these trimmed-down plans will hold up. New orders for capital goods excluding aircraft took a big jump in July, but they are still far below their pace of 1990, and the backlog of unfilled orders, excluding planes, is down 2.6% from a year ago. Also, new contracts for nonresidential buildings began the third quarter at a steep 20.7% annual rate below their second-quarter pace, when they fell 16%.
Capital spending by manufacturers is set to drop by 3.3% this year, with outlays falling steadily during the course of the year (chart). With factories now using only 78% of capacity, they have little need to add more facilities. Usually, operating rates have to edge above 83% before factories boost capital outlays in any big way.
Meanwhile, nonmanufacturing industries are set to lift their outlays by 2.6% this year. A boost in investment in aircraft is one reason, but spending by commercial and other service industries is expected to grow by 3.4%. This rise is further evidence of the service sector's restructuring. By investing in machinery instead of expanding payrolls, service companies intend to improve productivity and cut labor costs.
While this shift will help widen profit margins, the big losers in the near term will be many service employees. Job worries are a big reason why recent consumer surveys show an unusual lack of optimism this far into a recovery. And as long as that's true, consumers will not see the upturn with the same clarity as economists.