Finally, The Job Engine Is Revving Up

After two years of sputtering along because of a misfiring job market, the U.S. economy is now starting to hum. Last month's surge in employment, which surprised both Washington and Wall Street, means that this expansion is entering a completely new phase, as growth shifts to a pace that consumers and businesses can finally feel.

Stronger job markets will supply the missing spark. Add in the steep drop in long-term interest rates and the economic momentum generated at the end of 1992, and this combination will fuel demand for everything from new homes to household appliances to high-tech business equipment in a way that has been lacking since the recovery began in March, 1991. The result: an economy that can at last move ahead under its own power.

So far, businesses have benefited the most from this expansion. They have boosted productivity and cut costs--largely by slashing jobs, holding the line on wage growth, and using lower interest rates to shrink interest costs on old debt. Consequently, margins are fatter, and corporate profits have surged during the past year.

Now, households will share the bounty. With demand picking up, financially fit businesses are feeling more confident about expanding their payrolls (chart). At the same time consumers, who have been getting their own financial act together, show a new willingness to borrow and spend. Better job growth will only reinforce that trend.


The February employment report strongly confirms other recent indications that the labor markets are firming up. Nonfarm industries in the private sector added 364,000 workers to their payrolls last month, the largest monthly increase in five years. Some 60% of the 356 industries in the Labor Dept.'s survey added on new workers in February, the broadest gain in four years.

The size of the gain stunned the bond market. The promise of deficit reduction and other reports that the economy might be losing steam had lulled the market's inflation fears to sleep. But immediately following the release of the robust job report on Mar. 5, bonds sold off sharply, pushing long-term rates back up.

However, by the end of the day, the huge sell-off had almost reversed itself. The message: The bond market remains keenly focused on President Clinton's efforts to cut the deficit. Given that, little stands in the way of further declines in long-term interest rates.

Short-term rates are a different story. The size of the February job gains easily killed any chance that the Federal Reserve might put through one more easing of monetary policy. The Fed's own regional survey of economic conditions, released on Mar. 10, shows "continued improvement in early 1993." As a result, Fed policy now appears to be on hold for a very long time.

Although the jump in payrolls clearly is good news for the outlook, some caution is due. The February gains were probably not as strong as they look. Quirks in the government's seasonal adjustment of the numbers appear to have exaggerated the 96,000 job advance in construction and 131,000 increase in retail trade.

But even allowing for that, job growth is accelerating. Private payrolls now have risen six months in a row, with job gains averaging about 120,000 per month, up from an average of 20,000 in the previous six months. Last month's advance suggests that job growth is shifting to a higher plane.


That shift should become increasingly evident in coming months, especially when manufacturers finally give in to the need for more workers. Factories added only 10,000 employees in February, following a 29,000 increase in January, but that pace is bound to pick up.

Already, orders are backing up and inventories are running low. Manufacturers' unfilled orders rose 0.4% in January, the third rise in the past four months, following a string of 13 consecutive declines. And factory inventories shrank 0.2% in January, the fifth straight drop. Stronger demand in recent months has pushed the ratio of factory inventories to shipments to a near-record low.

Amid all this, manufacturers extended their workweek yet again, from 41.4 hours to 41.5 hours in February (chart). The workweek has been that long only one other time in the postwar era. With a clear impetus for further output gains, and with the workweek at a historic high, the need for additional workers seems obvious.

Another of the many bright spots in the latest employment numbers is the clear pickup in the hard-hit Northeast. Since July, 1992, job gains in Massachusetts, New York, New Jersey, and Pennsylvania have accounted for nearly 40% of the overall growth in civilian employment. Yet those states employ only 17% of U.S. workers.

Faster employment growth continued to shrink the jobless ranks in February. The unemployment rate fell from 7.1% in January, to 7% (chart). However, joblessness is still above where it was at the end of the recession, and further declines will be slow. Although hiring is picking up, it remains below the pace of a typical expansion.

The good news is that layoff-mania appears to be subsiding. The percentage of unemployed people in February who lost their last job fell to 52.3%, the lowest in two years. Also, the quality of new jobs is improving. During the past year, people who work part-time because they cannot find full-time work accounted for only 5% of overall employment growth, a sharp reversal from the recovery's first year.


Because unemployment remains so high, businesses will be under little pressure to raise wages to attract new workers. Pay gains had edged up at the end of 1992 because of increased overtime. But since new workers tend to earn less, the recent gains in hiring mean that wage growth in the latest months has slowed.

Hourly nonfarm pay in February rose a modest 0.2%, to $10.75. And wages have advanced by just 2.3% in the past year--down from their 3% pace in the previous 12 months. The average weekly pay in the nonfarm sector also increased only 0.2% in February, to $370.88.

Household finances, though, are in better shape than last month's pay numbers indicate. For one thing, weekly pay rose by 1% in January, and it had grown at a 3.1% annual rate in the fourth quarter. More important, the large influx of new hires means that the wages-and-salaries component of February personal income should show a solid gain when that data is reported on Mar. 29.

In addition, consumers have spent three years lightening their debt burdens. And the bond rally is enabling thousands of homeowners to free up billions of dollars by refinancing their mortgages at lower rates.

With smaller monthly bills to pay, consumers are beginning to feel more comfortable about borrowing again. Total installment debt rose $904 million in January. And since November, credit has grown $5.2 billion, the biggest three-month gain in 21 2 years (chart).

Revolving credit grew by almost $2 billion in January. Some of that increase likely reflected a delay between the time when consumers charged a purchase during the holiday season and when the bill showed up in the Federal Reserve's data. Reports from major credit-card companies indicate that card use in February continued to be above year-earlier levels.

Even with the recent spurt in borrowing, though, household debt burdens are shrinking. Credit outstanding as a percentage of aftertax income remained at its 71 2-year low of 16% in January. And debt loads will decline further as jobs and incomes continue to grow.

Indeed, if a faster pace of hiring has finally kicked in, the economy will motor along a lot more smoothly in 1993 than it did during the expansion's first two years. And consumers, who had been too worried about their jobs to notice the recovery, may at last be able to sit back and enjoy the ride.

Business Outlook

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