October Data Point the Way to a 'Jobless Recovery'

By BW Staff The Labor Dept.'s October employment report released Nov. 6 showed the unemployment rate rising to 10.2% for the month—the highest level in 26 years. Here, BusinessWeek compiles comments from Wall Street economists and strategists on the report: Paul Ashworth, Capital Economics The 190,000 decline in nonfarm payrolls in October illustrates that, even though the recovery in output began around the middle of the year, the U.S. economy is still not expanding rapidly enough to generate net gains in employment. There were some encouraging signs in the latest employment report: The 190,000 decline in October was slightly smaller than the 219,000 net loss the month before. Moreover, the declines in August and September were revised down by a net 91,000. One of the biggest positive contributions to employment came from temporary employment, which added 34,000 extra jobs. Temporary jobs aren't the type of positions that you want to see being created in an economy further into a recovery. But at this early stage of the cycle, that rebound in temporary jobs suggests employers will be adding extra permanent positions over the next few months. Finally, average hourly earnings increased by a solid 0.3% month-over-month, leaving the annual rate of growth unchanged at 2.4%. Now to the disappointing news: The unemployment rate jumped to a 27-year high of 10.2% last month, from 9.8%. The increase was mainly due to the much bigger 589,000 decline in employment, based on the alternative household survey measure. The household measure of employment is, on the whole, less reliable and more volatile than the nonfarm payroll measure. Nevertheless, it can't be dismissed entirely just as a statistical blip. It was also disappointing to see average hours worked unchanged at 33.0 last month. There are some signs of improvement: Hours and overtime hours are creeping up in manufacturing. However, in general, if firms aren't working their existing employees harder, why would they need to add new staff? Overall, this recovery is shaping up to be a "jobless" one, just like the last two. Our concern is that, unlike the last recovery, with credit still tight households aren't going to be able to smooth their consumption using credit until the labor market eventually strengthens. Marc Chandler, Brown Brothers Harriman Yesterday the U.S. reported a eye-popping 9.5% annualized rise in productivity and even more impressively manufacturing productivity leapt 13.6%. Today's 190,000 loss of jobs combined with the unchanged workweek illustrates what is going on. Businesses are still slashing workers faster as output increases. Sometimes the rise in productivity can be achieved by boosting the amount of capital investment per employee. This would be a favorable and sustainable rise in productivity. In contrast the current rise in productivity is happening as businesses cut costs, especially, labor costs. Higher productivity translates into lower unit labor costs. They fell 5.2% at an annualized rate in Q3. Over the past four quarters, unit labor costs have declined by 3.6%, the largest four-quarter drop since the time series began in 1948. There are several implications of this for the economy, policy, and therefore investors. First, strong gains in productivity and falling unit labor costs is part of the reason the Fed feels confident that price pressures remain subdued and that rates can remain low for "an extended period." Second, these gains in productivity coming from cost-cutting are not sustainable in the long term. It is in some ways like the inventory cycle. The shedding of unwanted inventory takes away from current production, but at some point the inventories would be slashed and just to meet current demand, output has to increase. This is what appears to have happened to some extent in autos, some related sectors, and semiconductors. Eventually, in order to boost output, businesses will have to hire more people. Third, the drop in unit labor costs coupled with the decline in the dollar may underscore the appeal of U.S. companies for foreign investors. Moreover, the below-the-surface risk of protectionism…also provides incentives to build/buy productive assets inside the U.S., which when push comes to shove remains the world's largest economy and strongest consumer market. Fourth, the rise in productivity and the decline in unit labor costs should augur well for business profit margins. [Our] equity strategists find that while there have been some positive surprises with the revenue numbers in the current quarterly earnings reports, the bigger surprise is on the bottom line as cost-cutting still dominates. Michael Englund, Action Economics The U.S. jobs report revealed mostly downside surprises, with a big 190,000 October payroll drop, though with 91,000 in upward back-revisions that left a small net upward payroll surprise, but a failure of the workweek to bounce from its 33.0 cyclical low, leaving a 0.2% drop in hours worked. We also saw a sharp rise in the politically sensitive jobless rate to 10.2% with a huge 589,000 drop in household employment that followed an even larger 785,000 drop in September, and a larger-than-expected 0.3% gain for hourly earnings. The full set of figures remains consistent with a positive but lean trajectory for real [inflation-adjusted] gross domestic product as we enter the fourth quarter, and we remain comfortable with our 2.3% GDP estimate, following an expected downward third-quarter GDP bump to 3.1% from 3.5%. Though market estimates for fourth-quarter GDP are generally higher, our forecast incorporates a hefty 4.6% fourth-quarter productivity surge that leaves considerable downside risk, though this gain follows the even larger 9.5% third-quarter gain reported yesterday. Our assumed increase would leave a huge 5.3% year-over-year gain through the four quarters of 2009.

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