Beyond the Jobs Figure Fixation

Good as the March number turned out, the market's obsession with it is obscuring the larger economic outlook, which remains robust

By Amey Stone

It's almost silly how much anticipation can build up for the release of one monthly economic report. But the market has focused relentlessly for the past few weeks on what one number -- March nonfarm payrolls -- signals about the state of the economy.

"I might as well have taken the week off and just come in on Friday [Apr. 2, the day of the employment report's release]" says Robert Smith, president of Smith Affiliated Capital, who noted that bond and stock markets had been subdued all week as investors waited for the news. "Everyone is focused on that number, and it has become the only number of consequence."

Much to the surprise of nearly "everyone," the Labor Dept.'s initial reading for new jobs in March turned out to be a thunderous 308,000, although the unemployment rate ticked up to 5.7 from 5.6 as more workers entered the labor force. Investors desperately wanted at least 100,000 jobs added to payrolls, and anything above 200,000 was expected to spark rejoicing -- except in the bond market, which worries that if job creation really finally does pick up steam, the specter of inflation isn't far behind.


  Seemingly at stake are the strength of the economic recovery and the likelihood of an interest rate hike by the Federal Reserve. "The whole outlook has become simplified," says Smith. "No jobs, then the Fed doesn't act. We get jobs, the Fed tightens."

But does one number really say so much about the course of the economy? Of course not. A month's worth of information about jobs at this point doesn't tell economists anything they don't already know. In his Mar. 31 report, Richard DeKaser, chief economist at National City, calls the excessive attention on the payroll number "Labor Market Myopia."

Remember, the economy is growing nicely. It's not expanding as fast as it did in the second half of 2003 (when gross domestic product climbed at a 6.1% annual pace), but it's still likely growing at a rate above 4%. Richard Hoey, chief economist at Mellon Financial, believes the 2004 GDP growth rate will be in the 4.5% to 5% range.


  That's fast enough to generate some sizable earnings gains at most companies, especially given the superlean operating environment. First Call is predicting that the first quarter (reporting season begins in mid-April) will be the third consecutive quarter of 20% or better earnings growth.

Such heady gains would inevitably lead to more corporate spending, more optimism in the corner office, and -- eventually -- new jobs. Already, operating profits per private-sector worker are at a new record, according to data from Moody's Investors Service. "Profits are doing just fantastic, and profits are what ultimately drive a capitalistic economy," says John Lonski, Moody's chief economist.

The problem -- as has happened in the last two or three economic rebounds -- is that businesses won't need to hire as many people in the U.S. as they did in past recoveries. Gains in communications and technology are not only allowing employers to make do with fewer workers -- but when they need people, they can hire overseas at cut rates (see BW Online Special Report, 3/22/04, "One Giant Global Labor Pool?"). "We're witnessing a global arbitrage of labor costs, and we're able to do that because of technology," says Smith. "That's not going to change."


  That's an important shift for business and for workers who will likely need to develop new skills in the coming years to stay competitive in a changing labor market. But despite how much of a hot potato job creation has become in the Presidential political season, most economists agree that it's not a disaster for the U.S. economy or financial markets. And it doesn't mean the U.S. job machine has stopped in its tracks. Economists agree that a lot more new jobs are in the pipeline.

Even if they hadn't shown up in the Apr. 2 report, they would have started appearing soon after. "Companies are only taking on workers if they're compelled to do so," says Lonski. But as the economic recovery continues, they'll be forced to. It may not be happening as fast as it has in the past, though, or as quickly as hoped (see BW Cover Story, 3/22/04, "Where Are the Jobs?").

Indeed, signs of job creation are so numerous that a few economists are starting to wonder if something is wrong with the government's methodology. Prudential Equity Group's chief investment strategist Ed Yardeni issued a report on Mar. 31 titled, "Quality of Data, Not Jobs, Is Poor." He described a strong tendency for first-reported payroll-employment numbers to dramatically understate job creation in an expanding economy.

Nonetheless, he notes, "distorted employment data" affect the markets, Federal Reserve policymaking, and even the coming election. "My hunch is that the economy is once again generating more new jobs than shown by the Labor Dept.'s first reports," he wrote.


  Lonski says he, too, believes the government may be underestimating payroll growth. His main evidence is that consumer spending, as well as the "proprietors' income" component of personal income report, has been strong. If the job market was really so weak, he also doubts President George W. Bush would be holding up so well in the polls.

DeKaser points to a pickup in business confidence (as measured by the Business Roundtable's March Economic Outlook Survey) and growth in temporary hiring (as shown by Manpower's Employment Outlook Survey) as signs that new jobs are on the way.

Mellon's Hoey also cites an increase in newspaper want ads and a stronger manufacturing sector, revealed in an Apr. 1 report from the Institute for Supply Management, the nation's trade group for corporate purchasing managers, as increasing his expectation for an improving labor market. "The definitive evidence has yet to arrive," he admitted on Apr. 1, joking, "economists generally like to predict what has already occurred."

Even as they were anticipating the March payroll report with fervor comparable to that of college hoops fans awaiting the Final Four double header, most economists admitted that a particularly good or bad number wouldn't change their outlook. As investors digest the specifics of the surprisingly good March employment report, they should keep in mind the need to always take a step back and keep the bigger picture in mind.

Stone is senior writer for BusinessWeek Online in New York

Edited by Beth Belton