Business Outlook: Fewer Layoffs Won't Mean More Jobs
The news from the job front continues to be "less bad." Payroll losses in August, totaling 216,000, were the least in a year, continuing the trend of progressively smaller declines. Now, with an economic recovery apparently under way, some key questions are cropping up: When will payrolls start growing again? How strong will job growth be? And when will the jobless rate begin to come down?
If monthly job losses continue to ebb at the rate of the past several months, the drop in payrolls, which has eliminated 6.9 million jobs over 20 months, would come to a halt in December. That seems likely if improving expectations for second-half economic growth are on the mark. Many forecasters are upping their projections into the 3%-to-4% range, a pace historically consistent with rising payrolls.
But then what? One concern is that poor job growth has been the norm during the last two recoveries. To some extent, that pattern reflects the tendency of mild recessions to be followed by weak recoveries. In the first year after the mild 1990-91 downturn, growth in real gross domestic product was only 2.6%, and payrolls did not turn up until three quarters after the recession ended. The economy grew only 1.9% after the 2001 downturn, which is barely visible in the GDP data, and jobs didn't pick up for seven quarters afterward.
On the flip side, deep recessions like this one have tended to be followed by strong recoveries. However, job growth in the current upturn will face a special set of headwinds, as lingering credit constraints and debt-burdened consumers limit growth. After the severe 1973-75 and 1981-82 recessions, first-year GDP growth shot up 6.2% and 7.7%, respectively, and payrolls grew 3.1% and 3.5%. If job growth were to match that pace in the coming year, monthly gains would average more than 350,000, which seems highly unlikely.
For one thing, job losses in this recession have much more frequently been the result of hiring cuts rather than layoffs. Monthly payroll losses, averaging about 300,000 in recent months, indicate a net result of about 3.7 million total hires per month and about 4 million job separations of all types. In the 12 months ending January 2009, as payroll declines became progressively worse, the rate of separations held about steady, but the rate of hiring plunged.
Economists at JPMorgan Chase (JPM) note that in the jobless recoveries after the last two recessions, the rate of firing subsided, as in previous recoveries, but businesses did not pick up their hiring rates until far into the upturn. Unfortunately, the same pattern may be shaping up this time. Although monthly payroll losses have been getting smaller since January, that easing has been the result of sharply fewer separations, while the hiring rate has continued to fall.
Businesses will remain hesitant to hire as long as overall demand remains subdued, and that is almost certain to be the case in the coming year. Spending in the U.S. and elsewhere stabilized last quarter, but the lion's share of growth in the second half will come from companies replenishing their depleted inventories rather than from a resurgence in demand. Plus, businesses remain keen on cutting costs and keeping productivity high. Productivity, measured as output per hour worked, soared at a revised 6.6% annual rate last quarter, and another big gain is on tap for this quarter.
How might all this figure into the unemployment rate? Economic growth of 3% or better would be consistent with a topping out in the jobless rate, perhaps in the next few months. That growth rate would generate more than the 100,000 to 150,000 jobs per month needed to prevent joblessness from rising further.
However, based on past trends, a one-percentage-point drop in the jobless rate would require payroll gains of about 350,000 per month for a full year. Even at that clip, unemployment would still be about 9% at the end of 2010. That means the first year of recovery could be a tough one for both politicians and policymakers.