03 Sep 2004 Employment Improving, But Will The Trend Continue?
U.S.employers added 144,000 workers to their payrolls in August. The increase represented the largest since May and the first increase since March. The increase follows a revised 73,000 jobs created in July which was more than twice the number originally estimated. Manufacturing is also showing renewed strength as that sector added 22,000 jobs, 16,000 more than July’s revised rate of increase.
The slump in the summer economy caused by rising oil prices, terror threats, and uncertainty in the presidential election may be coming to an end. Neal Soss, chief economist at Credit Suisse First Boston said that “the surge of growth that we had over the past year is resolving itself into a slower pace of growth, but growth nonetheless.”
Ethan Harris of Lehman Brothers says the economy needs to create about 150,000 jobs a month to absorb a growing workforce and to hold the unemployment rate steady. During the record 10-year expansion of the 1990’s the economy created an average of 201,000 jobs a month. That period of growth preceded the dot com bubble burst, September 11th, major corporate scandals, wars inAfghanistan andIraq, and the almost constant threat of global terror. The 90’s expansion was driven in large part by the largest increase in technology spending in history.
Today’s economy has effectively absorbed not only the huge overcapacity of the bubble, but has endured shocks extreme enough to have crippled earlier economies, according to Fed chairman Alan Greenspan. Following the last recession in this country, unemployment peaked at a high of 7.75% in June of 1992. From that peak and in the aftermath of Gulf War I, the economy began recovering with unemployment falling to 7.3% in October. But American voters were unhappy enough with the pace of recovery to unseat then President George H. W. Bush in favor of a relatively unknown Bill Clinton.
Today’s economy is much stronger in comparison to that of 1992 simply for having withstood all the negative forces mentioned earlier. The improvement in jobs this time almost identically matches the 14-month improvement from unemployment peak in 1992. But this recovery starts from a 1.5% lower peak. From here it likely gets tougher for the economy to add jobs at rates economists would call healthy. Continued growth in productivity is one reason. Ironically, productivity stifles new employment as it equips those already employed to create more goods and services than before without hiring new workers.
Another major detractor to job growth is increasing global competition for manufacturing and service jobs. In order to remain competitive with offshore companies benefiting from lower-priced labor, many American companies are obliged to produce increasingly abroad, thereby eliminating those jobs at home.
The quick fix for low employment has been enacted; namely lower taxes. But temporary tax cuts will not create meaningful long-term job improvement. Roughly 70% of new jobs in this country are created by small businesses. The owners of these businesses must compute their taxes on their own income PLUS that of their business’s income. The income of a small business can easily top the $300,000 level where the top bracket of 38.6% kicks in. That rate has been temporarily reduced to 35% (equal to the top corporate tax rate), but it will have little to no impact on small business’ decision to take on more workers unless it is made permanent. Until the divisive and unproductive arguments that tax cuts unfairly favor the rich while ignoring the huge negative impact high taxes have on small business owners, that vital segment of the economy will remain unnecessarily constrained in its job-production and competitiveness.
There is also much political rhetoric of government improving the economy by putting idle workers back to work. The failed economy of the Soviet Union and the malaise that continues in Russia today should demonstrate the fallacy of thinking that government is somehow the energy behind economic growth or of job creation. Lincolnobserved that it is the “fuel of interest” added to the “fire of genius” that drives an economy. In other words profits accrue to those who innovate and manage risk better than their competitors. Americahas more able competitors than ever before, increasing the potential that missteps in government policy could do greater damage to our competitiveness than in the past. Government can play a vital role in economic development by fostering an environment that “fuels interest” (by lowering taxes and regulations), and by motivating individuals to employ their “genius” to the betterment of all.
Measures such as tax reduction, regulation reform, and worker re-training all take time to show meaningful results. In the meantime ifU.S.businesses fail to remain competitive in global markets there will be fewer jobs at home to offer tomorrow’s better trained workers. Today American businesses fall into at least two categories: those that missed the opportunities of productivity enhancement and found themselves obliged to manufacture their goods abroad with cheaper labor and those that through the effective use of technology, science, and education are able to produce quite competitively here at home.
The declining unemployment rate of 5.4% demonstrates that mostU.S.companies fall in the latter category. But will that continue to be the case? Global competitive pressures are increasing not subsiding. While the policy decisions in the coming years will be important, it is the general tone and philosophies embodied by today’s policy makers that that will shape investor expectations and risk-taking decisions for the next few months or years. We are paying close attention.