Why This Upturn Still Has That Empty Feeling

Growth without jobs. It's like M&M's without the chocolate. But that's what is happening. The economy appears to have grown at an annual rate of 3% or better during the second half of 1992, but employment in the private sector rose a scant 0.2%. How can that be? The difference is a bounce in productivity. So far, increased output per worker has been the driving force behind the expansion.

Now, however, there are signs that economic growth is about to become better balanced between efficiency gains and job growth. The latest data suggest that labor markets are a little firmer as the new year gets under way. If so, that will help consumers cope with the raft of bills coming due after their holiday binge.

The problem is that payrolls still are increasing only slowly, and job growth will remain far below the typical recovery pace. That's because the pressure on companies to cut costs and boost productivity stems from the economy's structural problems--public and private debt, defense downsizing, and competitiveness--which will not go away anytime soon.

Still, recent signs are encouraging: Job growth in December was nothing to get excited about, but private payrolls are expanding a bit faster than earlier in 1992, especially in services (chart). And in manufacturing, the workweek was stretched so far at yearend that any further pickup in demand is likely to generate more jobs.

Moreover, the downtrend in new claims for jobless benefits is a leading indicator that foreshadows further employment gains in early 1993. In late December, the four-week average, including filings under the emergency benefits program, fell to 354,000 per week. That's the lowest level in 212 years--since before the 1990-91 recession.


Better, but still tepid, job growth was the message from the Labor Dept.'s employment report for December. Nonfarm industries added 64,000 workers to their payrolls last month, but that number was pulled down by the 45,000 temporary election workers who were dropped from government workrolls. Private employment alone--excluding government--rose by 86,000 jobs.

During the past three months, the private sector has put on 67,000 new jobs a month, on average. Those gains follow an average monthly increase of only 16,000 during the first nine months of the year.

Still, while that acceleration is heartening, keep in mind that employment growth at this stage of past recoveries has averaged more than 200,000 jobs a month. So far, job gains have been too small to reduce the ranks of the unemployed. The jobless rate in December was unchanged from November's level of 7.3%.

Private-sector service jobs have accounted for all of the growth in nonfarm employment since September. The gains in services, however, have not been widespread. Employment in retail trade is an especially big drag on payrolls in the service sector, in spite of the strongest holiday shopping season in four years.

In fact, the retail sector is a microcosm of the forces shaping the expansion. During the debt-driven spending boom of the 1980s, retailers added more than 4 million jobs. Now, they are under pressure to cut labor costs and increase efficiency.

Nonfarm employment is still 1.4 million jobs below the pre-recession level of July, 1990, and losses in retail trade account for 42% of that deficit. The benefit: Since retailers didn't add as many holiday workers as usual in 1992, strong sales undoubtedly produced a bonanza of profits, which will help get the industry back on its feet. The cost: fewer jobs for the expansion.


Productivity gains continue to lift the economy. Despite only modest job growth, companies are clearly busier as employees work longer hours. Overall working time--a reflection of both employment and the workweek--rose at an annual rate of 1.7% in the fourth quarter (chart). That was the largest quarterly increase in nearly three years, suggesting that the expansion is on firmer footing heading into 1993.

In December, the nonfarm workweek dropped steeply, to 34.3 hours, down from 34.6 hours in November. But those numbers may be distorted by unusually harsh weather, especially the storms that buffeted the East Coast during the government's survey week.

By contrast, the December workweek in manufacturing rose to 41.3 hours, up from 41.2 hours in November--the third consecutive increase. Last month's reading matched the 26-year high hit in May, 1992. Coupled with a slight uptick in factory employment, the longer workweek means that industrial production posted another healthy advance in December.


Clearly, the drive to boost productivity is giving output of both goods and servi-ces a lift, while putting the brakes on labor costs. That is a boon for profits and inflation, but the problem is sagging wage growth. Average salaries are barely keeping pace with prices, and incomes are lagging behind the recently rapid pace of consumer spending. All this raises questions about consumer buying in the first quarter.

The average nonfarm wage slipped by 0.1% in December, to $10.70 an hour, with the decline concentrated in service industries. The drop in wages, plus the shorter workweek, caused weekly pay to fall by 1% last month, after healthy gains in October and November.

For the entire fourth quarter, weekly pay rose at an annual rate of 3.2%, up from a 2.7% pace in the third period. The big plus for inflation: Most of this growth reflected longer hours, not pay hikes. Last quarter, hourly pay was up by only 2.5% from a year ago (chart).

Will pay raises look fatter in 1993? Companies undoubtedly will be in better financial shape, thanks to rising productivity and profit margins. But because job growth will remain modest, companies may not feel compelled to boost wages to attract workers. That why Household America may still feel some financial pinch, even as Corporate America improves.

The weakness in wage growth, however, didn't stop consumers from spending last quarter: Inflation-adjusted consumer buying probably rose at an annual rate of nearly 5%. And many of those purchases were on credit.

In November, installment credit grew by $1.22 billion. That was the third consecutive increase--and the first such three-month rise since late 1990 (chart). Auto loans climbed by $708 million, while miscellaneous credit, which includes mobile-home loans and uncollateralized personal loans, increased by $413 million.

Revolving credit, which includes credit cards, was up by just $100 million in November. But the December data will likely show a much sharper rise. Reports from the major bank-card companies suggest that last month's increase in revolving debt should easily eclipse the record advance of $3.6 billion set in January, 1988.

Clearly, renewed optimism about the economy's future, especially under a new Administration, made it easier for shoppers to buy on credit during their yearend spree. Moreover, the record number of mortgage refinancings in 1992, along with the 21-month-long paydown of existing IOUs, has made debt loads a bit lighter for many households. In November, installment credit as a share of disposable income remained at 16.1%--the lowest debt ratio in seven years.

But the huge credit-card bills that will arrive in January's mail may curtail spending this month. Also, expected reductions in tax refunds mean households will have less cash. So consumers may sit out the first quarter.

The outlook could change if hiring suddenly takes off. But for now, the emphasis on building profits and improving productivity suggests that companies will be miserly in their hiring. If so, modest job growth will only prolong the empty feeling among consumers that something important is missing from this recovery.

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