06 Feb 2004 Jobs

The headline Unemployment Rate, announced this morning, fell by a tenth of a percent to 5.6%, the lowest since January 2002.  But today’s focus is on the number of jobs created.  The change in non-farm (service) payrolls was up by 112,000 jobs, the biggest jump in three years, but less than expected.  Everyone from economists, to analysts, from bond traders to stock traders, and I suspect the White House expected a bigger number.  Why?  Virtually every measure of growth in theU.S.economy points to increased job formation.

The U.S. gross domestic product expanded by 3.1% in 2003 and economists believe it will grow more than 4% this year.  Fed policy makers are showing increasing confidence in the recovery, but say they will keep rates low as they believe it may take as much as a year for job growth to be fully realized.

“Even at 4% growth, we’re not necessarily exceeding by much the potential growth of the economy,” Fed Governor Ben Bernanke said Thursday. “So the labor market will improve but probably not very quickly, and the slack in that labor market means we shouldn’t expect to see rapid increases in wages over the next year.” Analysts said those views, which Mr. Bernanke has expressed before, suggested the Fed remains disinclined to raise interest rates this year as reported by the Wall Street Journal.

The Journal article further adds that “over the last three years, employers have cut more than two million non-farm jobs.  To replace those jobs within a year and keep up with population growth economists estimate businesses would need to create about 400,000 jobs a month. That far exceeds the average of the late-1990s economic boom. Most forecasters expect the economy to generate about 200,000 jobs a month this year.”

We have discussed in previous Briefs many of the primary reasons that jobs are not growing as fast as they have in previous economic expansions.  They include the dramatic rises in productivity, the loss of manufacturing jobs to China and abroad, the growing trend of outsourcing, and the general reluctance of very cautious business managers to hire new workers.  But an area that should be re-visited is the fundamental re-structuring of the job market.

Back in early December George Melloan, deputy editor of the Wall Street Journal, wrote an article on the subject of the changing American workforce.  The following excerpts are taken from the article:

“One reason theU.S.labor market has looked so glum is precisely because work habits and modalities have been mutating so fast that the commonly used labor-market statistics no longer accurately reflect true conditions.”

“The undercounting of the “establishment” survey helps explain why productivity gains — a supposed 9.4% year-to-year rise in output per worker per hour in the third quarter — have looked so fantastic. Quite likely, the number of workers is underestimated.  So what’s the answer to all of this? “

“One possible answer was provided by the Wall Street Journal’s Jon S. Hilsenrath at the beginning of [December 2003].  The statistically “missing” workers have apparently gone off to work for themselves.  He cites a BLS “households” report showing that 400,000 Americans have joined the ranks of the self-employed over the last year.  And many of them seem to be doing rather well.  Proprietor’s income, on average, is up 8.6% year on year. Delawareand evenCaliforniahave had surges in incorporations of limited-liability companies.  Tax filings put proprietors’ income at $800 billion annually, but it’s just possible that some self-employed workers insist on being paid in cash [therefore, not reflected in government numbers].”

“There is ample anecdotal evidence of this swing to entrepreneurship.  MyNew Jerseytown has sprouted an army of landscapers, who seem to be doing rather well judging from the ever-fancier rigs they use for carrying their lawnmowers, leaf blowers and the like.”

“Telecommuting has thrived as well.  A great many former corporate hands now work as “consultants,” doing pretty much the jobs they always did, except doing it on contract, without employee benefits and without having to show up at the office. And then there are the traditional forms of self-employment, such as shopkeepers, electricians, doctors and lawyers, who turn up in the burgeoning service economy.”

“But as Mr. Bush learned, when you try to shelter one group of workers — steel workers in this case — you make things tough for a lot of others. The International Institute of Economics has estimated that higher steel prices resulting from the tariffs cost some 26,000 jobs (or work hours equivalent to jobs) in steel-using industries.  On the other hand, Mr. Bush relieved burdens on entrepreneurs with his tax cuts. So things are looking up.”

Numbers released earlier this week do indeed foretell of better job reports in the coming months.  Manufacturing has finally started to show the dramatic increases that were expected in the face of growing demand and inventory replacement.  TheInstituteofSupply Managementfactory index rose to its highest level since 1983.  The January number represented the eighth straight month the index has been above 50, signaling expansion.

Factory orders soared in December as did non-manufacturing indexes, further confirming and economic recovery in full swing.  The 1.1% jump in factory orders was well above economists’ average prediction of 0.2%.  Another positive sign: The ISM reported today that its non-manufacturing business index, which gauges activity in the service sector, grew in January at its fastest pace since the ISM began tracking the sector six and a half years ago.

This economy is strong and getting stronger.  As the presidential campaign heats up expect to hear of nothing but the problems in the U.S.economy.  We will continue to take our cues from the numbers – government, corporate, and the markets.  The bond and stock markets each point to a gradual, but sustainable recovery in the economy.  The Fed continues to be very accommodative in their support of the recovery.  And we may even get permanent tax reductions in some key areas further stimulating entrepreneurial job growth and capital investment by established businesses.  Things are indeed looking up.