So far, massive job cuts by U.S. companies have not stopped consumers from spending. Despite a big jump in unemployment to 5.4% in October, low interest rates have kept car and home demand high and boosted retail sales.
But consumers will likely face a tougher slog in the months ahead. Rising corporate productivity is making it possible for businesses to maintain or boost output with fewer employees. That means companies will likely keep shedding workers well into next year, even if the economy starts growing again.
Indeed, many economists believe unemployment could hit 6.5% or so by June--a level that will hurt many experienced workers, reduce wage gains, and slam wallets shut. "Over the next few months, we are likely to start seeing a more traditional reaction to rising unemployment--a drop in consumer spending," says Lawrence F. Katz, a professor of economics at Harvard University.
The arithmetic is simple. Just to keep the unemployment rate where it is now, the economy has to grow fast enough to absorb the workers made expendable by rising productivity, plus any new entrants into the workforce. The U.S. labor force grows at a rate of about 1% annually. Most economists believe that the annual trend rate of productivity growth is now around 2%. So even after the recession ends, the jobless rolls could keep expanding as long as growth is below 3%--a rate few forecasters expect to see soon. "We're still on the up slope," says Ethan Harris, chief economist at Lehman Brothers Inc. "Continuing claims [of unemployment insurance] are consistent with a 5.8% unemployment rate already."
There are troubling signs that this recession, like the 1990-91 downturn, will be followed by a so-called jobless recovery. That slowdown ended in March, 1991, but high productivity meant that unemployment kept climbing for 15 more months, peaking at 7.8% in June, 1992.
The latest labor market reports show a sharp increase in the number of people who have lost jobs and haven't found new ones. In October, those job losers hit 3.1% of the workforce. Such long-term job loss is what forces people to cut back spending. Only when job losers hit 3% in October, 1990, for example, did consumption finally begin to shrink. "With the high percentage of job losers, we will see a plunge in consumption," says Srinivas Thiruvadanthai, an economist at the Jerome Levy Forecasting Center in Mount Kisco, N.Y.
WAGE CURBS. Another bit of bad news for spending: Unemployment seems to be getting high enough to hold down wage growth. Richard Berner, chief U.S. economist at Morgan Stanley Dean Witter & Co. estimates that in the three months ending in October, wages and salaries, adjusted for taxes, shrank at a 1.5% annual rate.
Falling wages and rising unemployment could start to undermine the housing market. The housing affordability index published by the National Association of Realtors shows a drop in the third quarter, despite lower interest rates. "Unemployment is often a good predictor of the housing market," observes Susan M. Wachter, a professor at the University of Pennsylvania's Wharton School.
One big question now for the labor market is whether the decline in technology spending will make it harder for companies to keep boosting output with fewer workers. But there are signs that the technology sector may be bottoming out. Tech production declined by only 0.7% in October, less than half the rate of the previous four months.
In the long run, higher productivity growth is clearly beneficial. But in the short run, it may mean that labor markets will take longer to recover than many Americans would want.
By Margaret Popper in New York