The Pall Over The Recovery? Blame It On Pink Slips

The case of the missing recovery grows murkier. The latest data offer few clues that point to a growing economy. Factory orders are falling, the construction industry is on shaky ground, and companies continue to lay off more workers than they hire.

Even the government's own reading of the economy can't provide much of an alibi for the recovery's whereabouts: The index of coincident indicators -- which casts light on current conditions -- was flat in September, while the leading indicators index hasn't risen since July.

The recent batch of bad news heightens the mystery of the recovery's lack of vitality (page 36 26 ). But policymakers in Washington are on the case. The Federal Reserve moved aggressively on Nov. 6 by cutting the discount rate -- its charge for bank borrowings -- by a half-percentage point, to 4.5%. The central bank also lowered the federal funds rate to 4.75%, just a few days after the rate had been cut by a quarter-point, to 5%. That's its lowest level in 18 years.

The Fed cited the "sluggish expansion of the monetary and credit aggregates" as a reason for its move, which had been expected. But the timing was a bit surprising because the action came in the middle of the Treasury's quarterly refunding, which was getting a cold reception by investors, and it immediately followed state and local elections across the country.

Banks responded to the move by cutting their own prime lending rates from 8% to 7.5%. Lower borrowing costs will help the economy in 1992, but right now the big concern for most consumers is a steady paycheck.


Job growth is almost nonexistent. Nonfarm payrolls dropped by 1,000 jobs last month. Less than half of the industries surveyed hired workers in October, and just 50.8% increased jobs in September.

Since employment hit bottom in April, only 282,000 new jobs have been created -- far below the average of 864,000 added in the first six months of past postwar recoveries. And almost all of today's workers have been hired in the health care field. Excluding those workers, jobs have edged up by just 67,000 since April (chart).

Meanwhile, the ranks of the unemployed continue to expand. The jobless rate rose to 6.8% in October, from 6.7% in September. Changes in the unemployment rate tend to lag behind swings in the business cycle, but at this point in past recoveries, the unemployment rate was already in a steady downward trend.

Job prospects are not good for those pounding the pavement. The Conference Board reports that its index of help-wanted advertising was flat in September, from its low level in August. Despite the recovery's start in spring, companies are very reticent about adding jobs. GOODS


Hiring is especially slack in the goods-producing side of the economy. That's a dangerous development because the rebounds in factory activity and in homebuilding have accounted for much of the boost in overall economic growth since spring. If these supports topple, the fourth quarter will be especially dreary.

Manufacturing jobs dropped by 32,000 in October, on top of a 31,000 loss in September. Pink slips were rampant in factories producing industrial machinery, electronics, and transportation equipment. And the factory workweek fell by six minutes, to 40.9 hours. The shorter week and job losses last month suggest that industrial output may have fallen in October.

The news from the National Association of Purchasing Management was also downbeat. The purchasing managers' index fell to 53.5% in October, from 55% (chart). The index remains above 50% -- a sign that the factory sector is expanding. But the momentum is slipping.

That's because demand remains weak. New orders for factory goods dropped by 1.7% in September, after falling 2% in August. Unfilled orders declined by 0.6% in September. And although factory inventories increased a small 0.4% in September, companies seem in no hurry to rebuild stock levels. This means that assembly lines won't be any busier this quarter, and factory jobs will remain hard to find.

There may be fewer construction jobs, as well, this quarter. Construction payrolls have fallen in 8 of the past 10 months, including a loss of 29,000 in October. The rebound in housing just hasn't been strong enough to offset the sharp slump in nonresidential construction.

In September, the 1.1% advance in total construction spending was led by a 2.9% gain in homebuilding. Spending on nonresidential projects, however, dropped 2% in September, its fifth consecutive decline. In addition, the F. W. Dodge Div. of McGraw-Hill Inc. says that contracts for new construction dropped by 5% in September. Nonresidential building contracts fell to their lowest level in eight years. With fewer projects on drawing boards, more pink slips are certain in the construction industry.

Hiring by service companies has taken up some of the slack created by the struggling goods side of the employment picture. Jobs in private service industries rose by 58,000 in October, but again, most new jobs were in health care. Retail trade cut 47,000 workers last month. Retailers don't seem to be hiring many workers for the holiday season. This suggests stores aren't anticipating a big rush of shoppers at yearend.

Such caution seems a good bet. Without a steady increase in new jobs and incomes, consumers -- whose purchases support two-thirds of this economy -- will be unwilling to boost their spending by much.

Already, consumer buying for this quarter is looking suspect. New, U. S.-made cars sold at a measly 6 million annual rate in October, down from 6.1 million in September. If consumer spending doesn't pick up soon, domestic demand this quarter could decline. And the index of leading indicators is raising questions about the outlook for early 1992.


The leading indicators -- designed to foreshadow the economy's future -- fell by 0.1% in September after no change in August (chart). A shrinking money supply, declining orders for capital goods, and a shorter factory workweek led the negative signals.

In addition, the index of coincident indicators was flat in September after falling 0.2% in August. And the October index should also be down. That's because the employment report indicates that three of the four coincident indicators were weak last month.

The slack labor markets are keeping downward pressure on wage growth. The average hourly wage dropped by 0.1%, to $10.41, in October. And because of a 12-minute cut in the workweek, weekly pay fell a sharp 0.7%. That suggests personal income may have fallen last month.

Hourly wages have increased by only 3.1% in the past 12 months. That's the slowest wage gain in 3 1/2 years and far below the growth of nearly 4% posted in the summer of 1990, when the recession started (chart).

The slowdown in hiring and work time has caused little drag on production levels. The result is that productivity improved in the third quarter. Output per work hour in the business sector rose at an annual rate of 2.3% last period, the first gain in a year. Output grew by 2.9%, while total hours worked were up by 0.6%, at an annual rate.

The increase in productivity kept the lid on unit labor costs. They rose at a 1.1% annual rate -- the smallest rise since 1988. Factory unit-labor costs fell by 0.7%. That's a good sign for inflation.

Slower growth in unit labor costs also should help corporate profits, which were still sagging in the third quarter even as the economy as a whole expanded (page 39 29 ). Figuring out how to keep the recovery on track, however, is a puzzle policymakers have yet to solve.

Clearly, any answer will have to include faster job growth. That would boost personal income and give a lift to consumer spending. Until the labor markets show clearer signs of strength, though, the recovery is likely to remain invisible to most consumers.

Before it's here, it's on the Bloomberg Terminal.