U.S.: Don't Mistake Rising Unemployment for a Weakening Economy
At first glance, the Labor Dept.'s employment report for March sent a mixed message about the economy: Payrolls posted a moderate gain, the first of the recovery, but the unemployment rate rose after two months of decline. While those two data points seem contradictory, the split reflects the two sets of influences affecting the economy right now.
The first group is the structural changes of the 1990s, including greater labor-market flexibility, larger productivity gains, and faster growth in real wages. They were evident during the downturn of 2001, and they are already influencing job-market and economic trends in the recovery of 2002. The second set extends from the classic business-cycle turnaround in the long-beleaguered manufacturing sector, as businesses replenish depleted inventories.
Taken together, the collection of structural and cyclical influences suggests that the economy as a whole will look much healthier in 2002 than the job markets will. Economic growth this year will be powered mainly by productivity. Hiring will pick up, but it may not be strong enough to stop the jobless rate from rising above March's 5.7%. But because the jobless rate remains historically low, wages should grow fast enough to keep household buying power rising.
AMONG THE STRUCTURAL CHANGES, the importance of temporary workers and variable pay, both of which allow businesses to match payrolls and labor costs to changes in demand, is already evident in the recovery. Jobs generated by help-supply agencies, which accounted for 24% of last year's private-sector job losses from March to December, are the primary support for job growth this year (chart). Private payrolls increased by 21,000 last month, but temp workers rose by 69,000, the second gain after more than a year of shrinkage. Excluding temps, payrolls are still falling.
Businesses will be slow to add on more costly permanent staffers. Given their desire to lift profits, companies will focus on extracting all possible productivity gains from their existing workforce. Private-sector payrolls will have to grow above 150,000 or so per month before the jobless rate can fall in a lasting way.
Job gains like that could be several months down the road, but businesses are at least starting to take a fresh look at their hiring plans. The Conference Board's index of business confidence shot up in the first quarter. That partly reflects a bounce back from the depressed levels after September 11, but it also shows growing optimism about the economic recovery. Some 28% of the CEOs surveyed anticipated higher employment levels in their industries in coming months, up from 19% at the end of 2001. More important, perhaps, those anticipating declines shrank from 51% to about 29%.
A second structural change in the economy, high productivity growth, was again evident in the first quarter. The March jobs data showed that overall hours worked increased only slightly in both February and March. For the quarter, they are below their fourth-quarter level. That means if the economy grew in the neighborhood of 4% last quarter, as expected, all of that gain came from productivity growth. Efficiency gains more than covered the increase in compensation last quarter, resulting in a second consecutive drop in unit labor costs--a key factor in the improving profits outlook.
But as was clear last year, productivity gains help both companies and workers. Since pay gains in line with productivity growth keep unit costs down, workers can achieve wage gains that keep their buying power ahead of inflation. The growth of production workers' hourly earnings has slowed in the past six months, from 4.4% per year to 3.5%. But with inflation slowing as well, real wages are growing faster now than they were six months ago (chart).
RECENT PRICE HIKES in oil and gasoline will eat into household buying power this spring, and how the Middle East crisis affects oil prices remains a wild card in the outlook. However, keep in mind that the rise in energy prices so far is partly a bounce from the low levels reached after the sharp but temporary drop-off in world demand after September 11. Crude-oil and gas-pump prices are still below their pre-September 11 levels. Moreover, even excluding the impact of lower fuel prices, real wages are still rising about 2.5% per year, one of the best performances of the past 30 years.
But the slowdown in cash pay very likely pales compared with the hit taken by stock options, part of the new generation of compensation. Consider two Labor Dept. measures of compensation: the employment cost index (ECI), which does not include realized gains from stock options, and the broader index of compensation published in its productivity report, which does account for options. There are other differences as well, but options appear to be the biggest variant.
Back in 1997, the ECI and the broader gauge were both growing about 3% per year. By late 2000, the ECI was rising by 4.7%, but the broader measure had surged to a 7.8% clip. By the fourth quarter of last year, the ECI was growing at an annual rate of 4.2%, but the broader gauge had fallen to a 2.3% pace. Still, even at 2.3%, compensation is growing faster than inflation. Look for buying power to keep expanding in 2002, giving support to consumer spending, which, in turn, will help to boost overall economic growth.
FOR THE FIRST HALF, at least, another big boost is coming from the inventory sector. The slowdown in inventory cuts is finally leading to an upturn in factory production. Unfortunately, layoffs are still evident in manufacturing, but the March employment report suggests the tide of pink slips may be ebbing.
In March, factory jobs fell by 38,000. That was the 20th drop in a row, but it was also the smallest loss since December, 2000. Factories did lengthen their average workweek by 24 minutes, to 41.1 hours (chart), with overtime rising by 18 minutes, the largest jump in six years. The extended workweek is a good omen for future job growth. Businesses typically extend the hours of their current employees when demand begins to pick up. When companies are convinced the demand growth is sustainable, they hire more workers.
It's hard to say when factory payrolls will grow in any meaningful way. The Apr. 8 announcement by Levi Strauss & Co. that it will lay off 3,300 workers is the latest example of how even successful U.S. manufacturers are moving production offshore to cut costs.
Manufacturers, which have shown a greater inclination to use temp-agency workers, are likely using temps as the first additions to their payrolls. That means a rise in factory payrolls will show up partly as a gain in service jobs, where the Labor Dept. counts temp workers. But this swing in who gets hired first is just one more sign of how the '90s wrought long-lasting changes in how the U.S. economy operates.
By James C. Cooper & Kathleen Madigan