U.S.: A "Jobless Recovery?" Not This Time
If you recall the "jobless recovery" of 1991-92, you also remember that it was as hollow and disappointing as an M&M without the chocolate. Now, with the April unemployment rate jumping to 6%, concerns about a similarly unsatisfying recovery in 2002 are cropping up.
Such worries are misplaced: This is not 1992. In the first three quarters of that recovery, the economy managed to grow at an annual rate of only 1.8%--not fast enough to keep private payrolls from falling by 457,000 after the recession had ended, which pushed the jobless rate to nearly 8%. Contrast that with this year's experience: The economy grew at a 5.8% annual clip in the first quarter, and several forward-looking indicators in the April employment report suggest hopeful prospects for future gains in both output and employment.
Another key difference this time is the cyclical strength of productivity growth--on top of its accelerated long-run trend (chart). Rising efficiency improves the outlook for corporate profits by drastically reducing the labor costs required to produce a unit of output. At the same time, productivity is buoying the real, or inflation-adjusted, pay of workers.
Measured as output per hour worked, productivity in the first quarter increased at an 8.6% annual rate from the fourth quarter, when it jumped 5.5%. You have to go back to the 1983 recovery to find back-to-back gains that large. Since the recession officially began in the first quarter of last year, productivity has grown at a 4.3% annual rate, compared with the 1.1% pace during the same period of the last recession.
First-quarter productivity was boosted by a cyclical jump in output. So in coming quarters, output per hour worked is likely to settle back closer to its long-run trend of about 2%. That means economic growth for the rest of 2002 will be more apt to come from both productivity gains and job increases--a combination that fights the notion of a jobless recovery.
WITH PRODUCTIVITY GAINS offsetting labor costs and helping to contain inflation, the Federal Reserve can afford to keep monetary policy extremely stimulative. As widely expected, the Fed voted unanimously on May 7 to keep its federal funds rate at 1.75% and reaffirmed its belief that the risks in the outlook are balanced evenly between economic weakness and inflationary pressures.
Despite robust first-quarter growth, the Fed said it wanted to see more convincing signs of a strengthening in overall demand before starting to nudge rates higher. The April increase in vehicle sales and strong advance in mortgage activity suggests that consumers remain steadfast (chart). But the Fed appears to want clearer evidence that business outlays for capital goods are gathering momentum. The Fed's post-meeting statement said that improving overall demand is "an essential element in a sustained economic expansion."
Historically, the Fed doesn't tighten policy until the unemployment rate begins to fall. That could take a few more months. Payrolls increased 43,000 in April, but they need to grow at a consistent monthly pace of 150,000 or more to absorb the influx of new workers into the labor force and allow the jobless rate to drop. That could push the Fed's first rate hike into late summer or early autumn.
Even so, as long as the economy posts growth for the year in the range of 3% to 4%, that pace will be sufficient to generate jobs at that key 150,000 clip and ensure that the jobless rate for this business cycle tops out near April's 6%.
IF ANYTHING, the jump in the unemployment rate from 5.7% in March said more about the past than the future. For one thing, the rise was influenced partly by the federal extension of unemployment benefits put into effect in March. That caused a rise in the number of workers counted as unemployed members of the labor force--most of whom might have otherwise left the labor force. Indeed, the workforce jumped by an unusually large 565,000 in April, and 85% of those people were counted as unemployed.
Second, the jobless rate is a lagging indicator of economic activity. Improving business conditions always bring more job seekers into the labor pool before companies are ready to hire them. That could also explain some of last month's spike in the labor force.
More important, the April employment report contained some signs of future job growth. For instance, the increase of 43,000 jobs, while small, was the broadest across industries in just over a year (chart). And the gain came despite a decline of 79,000 jobs in construction, part of which appears to be statistical payback for the boost in winter building activity created by the unusually mild weather. Aside from construction, March payrolls increased instead of declined, and April jobs rose by a sturdier 122,000. Private service-producing companies--nearly 80% of all private-sector payrolls--added 132,000 workers last month, the largest gain since the summer of 2000.
SERVICE PAYROLLS have been rising since December, with a significant part of the gain coming from workers provided by temp agencies. Those jobs rose by 60,000 in March and 66,000 more in April. Temp-hiring is a crucial leading indicator of permanent job gains. Businesses began to shed temp workers six months before overall payrolls started to drop last year, and increased temp hiring now suggests that companies are seeing greater demand.
Manufacturing is the weak spot in the hiring outlook. Factories, which were shedding jobs even before the recession officially began, still face intense global competition. They are unlikely to add many workers this year and will instead focus on improving productivity.
But the labor data signal that factory activity is again on the rise, another sign that final demand is picking up. Factory payrolls fell by 19,000 workers in April, but after losses averaging 109,000 per month last year, that was the smallest drop in a year and a half. Also, the factory workweek and overtime hours have risen to levels not seen in a year. Manufacturing output rose last quarter for the first time since 2000, and it appears to have increased further in April.
Another key difference between now and a decade ago is that, even with the pain of layoffs affecting some workers, households are decidedly more upbeat now. Back in 1992, job jitters kept the Conference Board's index of consumer confidence seesawing between 50 and 80. In April, 2002, it stood at 109. Also, back in the early '90s, Fed Chairman Alan Greenspan often referred to job insecurity as a key weakness holding back that recovery. This time around, the data offer some hope that job seekers will find a little more satisfaction at the hiring office.
By James C. Cooper & Kathleen Madigan