June 21, 2010
Of the 15 million unemployed Americans, 6.8 million have been out of work for 27 weeks or longer. If you’re one of them, the news of a slowly improving job market is small solace. But the numbers are beginning to show the glimmerings of recovery. A year from now we may very well look back at this period as a turning point in the economic recovery, when private employers began hiring again. But that will take a confidence boost from Washington.
Economists like to say that employment is a lagging indicator, meaning that jobs growth historically has lagged economic growth. In a typical business cycle, the stock market (a leading indicator) rises first, anticipating a revival of corporate profits. Then you see economic growth pick up. But it’s only after corporate balance sheets are flush with cash from a combination of cost-cutting and increased demand, and confidence in the executive suite is high again, that employers start hiring.
Well, we are seeing that scenario unfolding again this time around, albeit slowly and with a few new twists. The S&P 500 is up 65 percent since its March 9, 2009 low. Economic growth was up 3 percent in the first quarter of 2010, after a 5.8 percent surge in the fourth quarter of 2009, leading most economists to conclude that we have moved from the recovery to the expansion phase of this business cycle. Corporate operating profits rose 51 percent in the first quarter of 2010, leaving corporations flush with cash. And that’s key to future hiring. Says Lisa Emsbo-Mattingly, director of economic analysis for Fidelity Investments: “The best long-term indicator of employment is corporate profitability.”
The X-Factor: Business Confidence
The sticking point appears to be business confidence, that amorphous X-factor that tips the balance between filling the need for boots on the ground with part-time workers or longer hours on the job, and hiring full-time workers with their added costs. Says Jeffrey A. Joerres, chairman and CEO of Manpower Inc., an employment services company that surveys hiring managers across the globe quarterly: “The U.S. is in the beginnings of a hiring recovery.” But it appears to be a tentative one. While the Manpower survey found robust hiring plans in India, Brazil, Taiwan and China, optimism among U.S. employers, though up strongly from a year ago, remains muted. Says Joerres: “There is still economic uncertainty, which is going to bridle stronger hiring."
Doing More with Less
Overall, at this stage of the U.S. economic recovery, we are behind schedule in terms of job creation. Also, pay increases have been virtually nonexistent as workers in a sluggish economy have little leverage when it comes to income.
So far, growing demand in the U.S. has been met largely by hiring part-time workers, a trend that in the past has presaged more full-time hiring. Temporary work was up 16.4 percent year-over-year in May, the fourth straight month of annual increases, and the largest annual gain since November 1994.
Also, we’ve seen a rise in hours worked. From August 2008 to October 2009, average hours worked weekly in America collapsed from 33.7 to 33 , one of the steepest declines since the Bureau of Labor Statistics began collecting data in 1964. By May, the average workweek had risen to 34.2 hours overall, and 40.5 for manufacturing workers. That may not sound like much, but Michael Feroli, chief domestic economist for JP Morgan, estimates that in terms of income growth it is the equivalent of adding over a million new private sector jobs.
Feroli expects this preference for part-time hires and longer work hours for existing employees to continue for some time for a variety of reasons. In part, he sees it as “a symptom of some lingering caution on the part of managers toward the durability of the recovery.” No surprise, given the threat of a eurozone contagion. In addition, employers are concerned about higher taxes and increased government mandates related to health care and other employee benefits.
A Turning Point?
Still, there is a point at which boosting productivity, hiring part-time workers and extending hours worked isn’t enough to meet demand – and some experts believe we are there. “We’re probably bumping up against a wall,” says Feroli. That suggests the corporate sector will need to start investing again. Sure, that means capital spending on machines. But they take time to come on line. So, it also points to increased hiring. And with labor costs relatively low in the U.S. versus other countries, it makes sense to hire at home. Feroli sees U.S. hiring picking up in the second quarter.
Despite our natural frustration with the pace of the pickup, there are some positive signs:
• Net job growth has increased for five months in a row, according to the Labor Department. Though private sector job growth stalled in May after two months of increases, that may be due to low-income workers grabbing flexible, $18-an-hour Census jobs instead of other private sector work. “That’s a typical pattern, which we saw in 2000,” says Dean Maki, chief economist at Barclays’ Capital. Once the Census jobs go away in June, he expects to see a pickup in private sector job growth. Indeed, he’s forecasting about 225,000 net new private sector jobs in the coming months.
• The Monster Employment Index, a monthly gauge of U.S. online job demand on Monster.com and other job sites, rose at an annualized rate of 14 percent in May, the largest year-over-year growth rate since April 2007. Demand rose in 15 of 28 metropolitan regions and 13 of 23 occupations surveyed. While demand for workers in real estate and accommodations edged down in May, demand for health care and technology workers rose.
Of course, there are unique aspects to the recent downturn that are impacting this recovery. An implosion in home values in the wake of the subprime loan crisis has hit real estate particularly hard. As a result, construction work has not rebounded as swiftly as in the past. Government infrastructure spending may help, but probably not enough to employ the many jobless in this sector. Likewise, the credit crunch has crimped small business creation, which has historically helped fuel a recovery in jobs. This time around, it’s been much tougher to get a second mortgage, not to mention a business loan. Easier credit for worthy small businesses is a key to spurring job growth.
In the end, whether this tepid jobs recovery takes off will depend heavily on business confidence. And that may depend on leadership from Washington – not so much in terms of passing a jobs bill, or investing in infrastructure programs, but creating a tax and regulatory environment that is consistent and reasonable. Otherwise, large employers may delay expanding their permanent workforce, and tomorrow’s innovators may not take the leap of faith to create the new business and new jobs of tomorrow.
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