Putting Our Slow Jobs Recovery Into PerspectiveBy
Disappointing, but not shocking. The government’s report Friday that the economy created fewer jobs than expected in April—115,000—showed an unwelcome deceleration of America’s job-creating machine. Economists surveyed by Bloomberg News had a median forecast of 160,000 jobs created. In the big picture, though, the nearly three-year-old expansion is proceeding at the same pace as the previous two. Slow recovery, in other words, is the New Normal.
The Bureau of Labor Statistics reported that the unemployment rate fell to 8.1 percent in April from 8.2 percent in March. But that wasn’t great news, because it reflected a decline in the share of the population in the labor force, to the lowest level since December 1981. When people drop out of the labor force they aren’t counted as unemployed, so the jobless rate goes down.
More bad news: Average hourly earnings were essentially unchanged, and there was no increase in the length of the average hourly workweek. One of the few bright spots is that the government revised upward its estimate of job creation in March, to 154,000 from the initially reported 120,000.
What makes this recovery seem so frustratingly slow is that the U.S. is coming out of a deeper hole this time. In the 1990-91 slump, employment fell by 1.6 million. The 2001 slump was worse: 2.7 million jobs lost. But neither comes close to the disaster of the 2007-2009 recession, when employment fell by 8.8 million.
To put it simply, if you fall down a well, you’ll climb out faster if it’s 10 feet deep than if it’s 100 feet deep.
The chart above shows job creation in the months after the economy hit bottom in each of the past three recessions. The last three low points were January 1991, November 2001, and June 2009. (The low point for the economy is designated by the National Bureau of Economic Research and doesn’t necessarily coincide with the low for employment.)
The most important takeaway from the chart is that there is no significant difference between the three recoveries in terms of rapidity. The current recovery is slow, all right, but it’s no slower than the two previous ones.
James Paulsen, the chief investment strategist at Wells Capital Management, called this pattern to my attention in a visit to the magazine this week. Paulsen has a similar chart in the 43-page deck of slides that he shows clients.
“People say the economy is broken,” Paulsen told me. “It’s not. This is the New Normal. And the New Normal is 25 years old.” The New Normal, he says, goes back to the mid-1980s, when the rate of labor-force growth notably slowed.
Growth in output is closely linked to growth in the number of workers, so when labor-force growth slowed, so did the speed limit of the economy, Paulsen says. Since the mid-1980s the economy’s growth rate has rarely exceeded 4 percent. It was 2.2 percent annually in the first quarter of this year.
“I remember in 1979, CEOs used to brag about increasing payrolls,” Paulsen says. Increasing revenue was CEOs’ top objective, so they would staff up accordingly. If they overstaffed, they could wiggle out of trouble by raising prices or counting on population growth to raise demand and bail them out. When population growth and economic growth slowed, CEOs turned more cautious and focused on raising profits through rigorous efficiency.
In contrast, hiring today is a last resort.
The good news for job seekers is that CEOs may well be forced into that last resort, because they have exhausted opportunities for efficiency improvements. Productivity—i.e., output per hour—fell at an annual rate of 0.5 percent in the first three months of 2012, the government reported May 3. It’s impossible to get more work out of the existing staff. So if demand grows now, companies will have to add workers to satisfy it.