Posted on 12/12/2003 5:10:00 PM PST by arete
The spin-meisters are hard at work proclaiming the long awaited healing of the US labor market. Jobs have now been up for four months in a row, and many of the so-called leading indicators of future employment growth -- jobless claims, work schedules, and purchasing managers’ hiring intentions -- are flashing green. And so the verdict has been rendered: At long last, the great American hiring machine is finally shifting gears -- marking a critical turning point for the US economy on the road to sustainable recovery.
I don’t buy it. As I read the US labor market, there is still compelling evidence of a fundamental breakdown in the time-honored relationship between aggregate demand and employment. While it seems that the worst of the layoff carnage is over in the aggregate -- at least for the time being -- this recovery bears no relationship whatsoever to the classic hiring-led upturns of the past. At work, in my view, is an increasingly powerful global labor arbitrage that has turned the US labor market inside out (see my 6 October 2003 dispatch, “The Global Labor Arbitrage”). Such an outcome not only challenges the case for sustainable economic recovery, but it has profound political implications as the United States now moves into its presidential election cycle. As incumbent politicians come face-to-face with the angst of beleaguered workers, trade frictions and protectionism could well intensify. Needless to say, a lot is riding on the state of the US labor market.
There seems to be a real disconnect between the actual numbers on the hiring front and the impressions that have been formed in financial markets. Total nonfarm payrolls have expanded by only 328,000 workers over the August to November 2003 period -- an average of 82,000 per month. That’s far short of the pace of job creation that normally occurs at this stage in a business cycle recovery -- somewhere in the range of 250,000 to 300,000 per month. Yet many have been quick to interpret the recent modest pickup in hiring as a sign that Corporate America is finally breaking the shackles of risk aversion and emerging from the funk of recent years. The mix of recent hiring trends tells a very different picture. It turns out that fully 84% of the total increase in nonfarm payrolls over the August to November period is traceable to hiring in four segments of the labor market -- the temporary staffing industry, health, education, and government -- where combined jobs have increased by 68,000 per month. In other words, the bulk of the so-called hiring turnaround since August has been concentrated in either the contingent workforce (temps) or in those industry groupings that are least exposed to global competition. This hardly speaks of a US business sector that has consciously made an important transition from downsizing to expansion. It merely reflects the fact that scale is increasing in the most sheltered and least productive segments of the economy.
Those trends stand in sharp contrast to employment conditions in those segments of the economy that are most exposed to tough competitive pressures. Over the past four months, jobs have continued to decline in manufacturing, the information sector (i.e., telecom, publishing, data processing, and broadcasting), wholesale distribution, and finance and insurance. Moreover, at the same time, employment growth has been anemic in transportation and warehousing and in a broad array of professional and business services other than temps (i.e., legal, computer systems design, management consulting). Collectively, these “exposed” segments of the economy employ about 47 million workers, or 36% of the total nonfarm workforce. Over the August to November time period, jobs in this large collection of industries have contracted, on average, by 20,000 per month.
Maybe it’s a stretch to conclude that the hiring shortfall in the exposed segment of the US economy is traceable to the global labor arbitrage. After all, we do not have up-to-date statistics on hiring trends on the other side of this story -- in the world’s major offshore outsourcing platforms. But there can be no mistaking the disconnect between hiring and aggregate demand that has occurred during a period when US economic growth accelerated to an extremely vigorous pace. In my view, that disconnect is yet another manifestation of a structural change in the role of America’s domestic workforce. By our reckoning, private sector payrolls are currently 7.4 million workers below the level that would have been implied 24 months into the average hiring-led recovery of the past.
Something new and big is at work in accounting for that discrepancy. In my view, global labor arbitrage deserves serious consideration as a possible explanation. It is framed in the context of three mega-forces that have never been at work in earlier economic recoveries: First, outsourcing platforms in goods (i.e., China) and services (i.e., India) that exist on a scale and with scope never seen before; second, the Internet -- a post-1995 innovation that has revolutionized the logistics of supply chain management in manufacturing and also enabled the cross-border transmission of knowledge-based output from offshore white-collar services platforms; and third, the unrelenting push for cost control in an era with limited pricing leverage -- the internalized incentive that forces high-cost US businesses to turn increasingly to the IT-enabled offshore outsourcing model. Maybe it’s a coincidence that these forces have come into play at precisely the moment when America has broken the mold on the connection between hiring and aggregate demand. I doubt it.
But what about the leading indicators that have been flashing signs of more vigorous recovery on the hiring front? Most believe that improved purchasing managers’ sentiment -- especially an employment component that finally moved back above the “50” threshold in November -- signaled an imminent rebound in factory hiring. Needless to say, that didn’t exactly match up with the actual decline of 17,000 reported for November. One possible explanation is that the purchasing managers’ gauge is nothing more than a diffusion index -- simply indicating the portion of those sampled who thought jobs were on the rise. As such, it provides no information content on the magnitude of any employment increase -- thereby opening up the distinct possibility that anemic hiring growth of those reporting headcount increases was more than offset by considerably larger job cuts by those still reporting contracting payrolls. Purchasing managers’ gauges are qualitative barometers, at best. In this unusual labor market climate, they may have surprisingly limited information content.
Nor does the recent lengthening out of the work week appear to be giving a good signal of a prospective pickup in hiring. The theory, in this case, is simple: Rather than rush out to hire workers at the first glimmer of revival on the demand front, businesses remain suspicious of a lasting recovery and prefer instead to ask existing employees to work longer; if the demand recovery then sticks, that suspicion will be converted into conviction and hiring will follow with a lag. It’s a great theory, but it doesn’t seem to be working any more. In the manufacturing sector, where the relationship between the hourly work week and employment has historically been the tightest, the average work week has risen sharply for four months in a row -- from 40.1 hours in July to 40.8 hours in November; over the same period, overtime work has risen from 4.1 to 4.4 hours. In previous cycles -- excepting the jobless recovery of the early 1990s -- an increase of this duration and magnitude in the work week would have triggered a rebound in factory hiring by now. The fact that this relationship appears to have broken down may simply be another manifestation of the structural shift in the role of labor -- substituting longer work hours for hiring and then relying increasingly on low-wage outsourcing and temps to do the incremental staffing once existing workers hit physical limits.
This jobless recovery has just celebrated its second anniversary. Never in the modern-day history of the US business cycle has there been such a profound shortfall of hiring. For months we’ve been hearing that’s about to change. The recent sharp acceleration in the US economy, in conjunction with a modest improvement on the overall hiring front in the past four months, have led most to believe that an old-fashioned hiring-led recovery is just around the corner. Don’t bet on it. The global labor arbitrage tells me there’s something new and big going on that will continue to defy the optimistic spin that is now being put on a still very sluggish American labor market.
By our reckoning, private sector payrolls are currently 7.4 million workers below the level that would have been implied 24 months into the average hiring-led recovery of the past.
Never in the modern-day history of the US business cycle has there been such a profound shortfall of hiring. For months we’ve been hearing that’s about to change. The recent sharp acceleration in the US economy, in conjunction with a modest improvement on the overall hiring front in the past four months, have led most to believe that an old-fashioned hiring-led recovery is just around the corner. Don’t bet on it.
Roach should just right to the point -- you don't need actual real employees in an artificially created illusionary recovery.
Richard W.
Comments and opinons welcome.
Richard W.
Members of the Federal Reserve's Open Market Committee said signs of economic growth, while encouraging, still may not generate substantial new jobs until late 2005, minutes from their Oct. 28 meeting said.
"Members generally anticipated that an economic performance in line with their expectations would not entirely eliminate currently large margins of unemployed labor and other resources until perhaps the latter part of 2005 or even later," the minutes said.
The language in the October minutes pushed back expectations of when the U.S. central bank will raise its benchmark interest rate. Committee officials met again this week and left the benchmark overnight lending rate unchanged at 1 percent, a 45-year low.
"The ... [committee] minutes are being used as another tool in their box of communication tricks," said Ian Morris, chief U.S. economist for HSBC Securities USA Inc., in New York.
The reference to the weak labor market "is a strong hint about the likelihood of the Fed not raising rates at all next year."
I think that when the economic weakness comes out of hiding, they will be forced to lower rates.
Richard W.
That will force the dollar even lower. OPEC will really love that.
I have to keep stepping back and trying to look at the bigger picture. When you zoom in, it looks like we are in inflationary times, but when you zoom out, you see that the inflationary efforts really are a fight in a much larger deflationary battle. Right now, the economy is completely dependent on the creation of debt and Greenspan can't raise rates even if commodity prices go right through the roof. It's a death match. Inflate of die. Just a question of trying to delay the process cause the FED has placed us in a no win situation. We either die the slower death of keeping the bubbles inflated or we die a quicker death by bursting the bubbles.
Richard W.
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