The Recovery Is Here, but the Jobs Aren't

thestreet.com ^ | 08/04/2003 07:24 AM EDT | Aaron L. Task

[ckilmer]

The Recovery Is Here, but the Jobs Aren't

By Aaron L. Task Senior Writer 08/04/2003 07:24 AM EDT Click here for more stories by Aaron L. Task

Finally, it seems, the long-awaited second-half recovery is upon us. Last week's barrage of economic data included some convincing signs the economy is on the mend and poised for stronger growth. However, Friday's surprising 44,000 decline in nonfarm payrolls suggests the recovery remains jobless, and may stay that way even if economic growth accelerates.

That employment is a "lagging indicator" has become a mantra for optimists, who foresee a virtuous cycle of stronger economic growth generating rising employment, which perpetuates consumer spending, fueling higher corporate earnings and, ultimately, still stronger GDP growth via increased business spending. (Lather, rinse, repeat.)

Last week's second-quarter GDP report and national manufacturing index included hints of this, bulls declared. Economists further cite recent strength in commodity prices as a sign of hope for the beleaguered manufacturing sector, where about 90% of the 2.7 million jobs lost since February 2001 have occurred.

But this recovery is proving to be different when it comes to employment trends. Some forecasters believe the more than 2.4 million manufacturing jobs lost may be gone for good, further suggesting rising commodity prices augur strength in global manufacturing, not necessarily in the U.S.

"The slowness of recovery doesn't adequately explain the tremendous weakness in manufacturing" employment, said Anirvan Banerji, director of research at the Economic Cycle Research Institute and a RealMoney.com contributor. "Manufacturing employment has been plunging [and] is not slowing down. When you see that trajectory and compare with earlier jobless recoveries, you see how different it is this time."

On Friday, the government said the manufacturing sector shed another 48,000 jobs in July, its 36th consecutive monthly decline. Meanwhile, even as the unemployment rate unexpectedly dipped to 6.2%, the average workweek for all employees fell to its lowest level since 1964. Those figures contributed to Friday's weak stock market. More importantly, they reflected Banerji's theory about this recovery being unique, and in a way that should be disturbing to those betting on a robust jobs recovery.

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No Bounce This Time? How manufacturing jobs performed following recessions

Source: ECRI As the accompanying chart demonstrates, employment declines had at least started to level off at similar points in recoveries that followed mild recessions in 1969-70 and 1990-91 (The 1980-81 recovery was omitted because it was so short-lived.) Given the ongoing pace of job losses in the current environment, the conventional wisdom that job growth will arrive once GDP growth picks up is "completely inadequate," he declared. "We've never had a recovery in which nonfarm payrolls declined this long. Something else is going on." With apologies to Marvin Gaye, what's going on is a "major structural shift in manufacturing employment," Banerji said, extrapolating on points made here. Down on the Upside Faced with limited pricing power and rising input costs -- including raw materials, employee benefits and pension obligations -- the only way for U.S. manufacturers to compete is by raising productivity or outsourcing production, he observed. Higher productivity means less need for workers; outsourcing certainly does. Banerji noted the trend of jobs migrating to China has accelerated, citing "huge shifts in the pace of movement," not just from the U.S. but from Taiwan, Korea, the Caribbean and Mexico as well. "There appears to be a permanent shift in manufacturing employment [and] it's not clear when it ends." If there is a secular shift afoot, the cycle watcher isn't sure how either lower interest rates or tax incentives for spending on business equipment will boost employment, creating a big crimp in the virtuous-cycle scenario mentioned above. Currently, this possibility isn't being considered by most, but "the idea jobs aren't coming back will gain mainstream acceptance," predicts Brad Ruderman, managing partner at Los Angeles-based Ruderman Capital Partners. "There's going to be a seminal change in the thought process. People are going to figure out it's more secular vs. cyclical." Page 3 Related Stories The Market Is Primed for Good News Data Delight but Then Resistance Is Met Ruderman's hedge fund is long Infosys (INFY:Nasdaq - commentary - research) and Cognizant (CTSH:Nasdaq - commentary - research), as beneficiaries of the trend toward outsourcing of information technology jobs -- something far smaller in magnitude than trends in manufacturing but which has received increased attention, perhaps because the jobs lost are higher-paying. (RealMoney.com's Paul Kedrosky recently examined this burgeoning trend.) To date, however, those optimistic about stocks continue to believe strong jobs growth will, by definition, follow stronger economic performance. Panning for Hope One oft-cited reason for forthcoming strength in the economy -- and manufacturing in particular -- is strength in commodity prices. The Journal of Commerce-ECRI Industrial Price Index is up 14.4% on an annual basis, amid near across-the-board strength in various commodities. There is evidence linking strength in commodities to better economic growth and corporate earnings. Indeed, the industrial price index contributed to the growth rate of the ECRI's weekly leading index hitting a 20-year high last week. That, in turn, prompted Banerji to declare: The "window of vulnerability" open earlier this year has now closed, "making it very unlikely that the economy will enter a recession this year, even in the event of an external shock." One reason some observers are upbeat about economic growth but downbeat about jobs is that higher "commodity prices are more a reflection of global demand [for raw materials] vs. U.S. demand," said Gerald Cohen, senior economist at Merrill Lynch. "We are seeing a pickup in the U.S. economy, but higher commodity prices is more a positive sign about global growth vs. U.S. growth." Of course, most economists believe stronger growth anywhere in the global economy is a good thing and will ultimately boost the U.S. economy. Perhaps that's why Alan Greenspan made the politically insensitive observation last month that it doesn't really matter where products are made, implying the U.S. doesn't need a manufacturing sector. That may be true in a macro sense, and most economists, including Greenspan, have faith the U.S. economy will innovate and create new jobs, and that versatile American workers will adapt to new opportunities. In the meantime, however, there's a lot of pain at the micro (i.e., real people) level, which may not be ending anytime soon. Given those folks are potential investors and voters, such harsh realities could have widespread implications.

[LS]

Just as they did in the Reagan years, the media are putting themselves in a tiny box. They have now tacitly agreed that manufacturing---not just services---are up; that interest rates are down; that personal income is up. They have CEDED every point by constantly referring to the "touchstone" of jobs.

Jobs are a lagger. When they come back, and they will, the media will have no where else to go, just as in the Reagan years, they tried to backpedal by blaming the "deficits" on Reagan. Voters knew better, in overwhelming numbers.

[eyespysomething]

I heard on the news that part-time jobs created was up, and up some very large amount. The person went on to say that this is usually a forebearance to the job market rebounding. Sorry I can't remember who said it.

Don't know much about economy, don't claim that I do. That's just what I heard.

[twigs]

I think that's right. Companies who hire part timers need employees, but want to test the market waters before they make a full commitment and then get stuck with having to lay people off. Another reason for part-time/temp help, too, is that benefits have gotten so burdensome that they also represent a liability--both financially and legally.

[samuel_adams_us]

What do you mean?? The economies of India, China and now countries in south america are recovering at a remarkable rate!

[familyofman]

"...there's a lot of pain at the micro (i.e., real people) level, which may not be ending anytime soon. Given those folks are potential investors and voters, such harsh realities could have widespread implications. "

W & Co. had better start paying attention to the real numbers (jobs & wages) if he wants a chance at term #2. Telling an un/under-employed person that the economy is getting better won't win any votes, neither will tax cuts that don't add up to increased income sway anyone.

[scottlang]

I agree totally.

[SouthParkRepublican]

"The economies of India, China and now countries in south america are recovering at a remarkable rate!"

They should be, they’re having a tech boom in those nations. I always get a kick out of the unemployment figures when they come out. Might as well look at chicken entrails to figure out how many are really unemployed and use a crystal ball to determine how many are underemployed.

[oceanview]

exactly right. offshoring is taking alot of jobs, and creating alot of job uncertainty for people who still have jobs in those areas. I don't see anything turning this around.

[the gillman@blacklagoon.com]

...Perhaps that's why Alan Greenspan made the politically insensitive observation last month that it doesn't really matter where products are made, implying the U.S. doesn't need a manufacturing sector...

And there are intelligent hard working people who are out of work. Why couldn't we get a guy with a quarter of a brain cell in this chump's place?

[cars for sale]

this is like trying to make brownies from
a recipe that never mentions eggs , incomplete
and unresulting. Job count from firsr run numbers
of an economic upturn will always lag. An upturned economy realizes cash flow and that cash flow nearly always first pays last years bills, not tomorrows. A sustained quarterly upturn only hires new help. Here,a sustained
economic upturn is the egg neded .

[riri]

Why couldn't we get a guy with a quarter of a brain cell in this chump's place?

They would be in the private sector.

[talleyman]

I agree. The classic rust-belt manufacturing economy is never coming back to what it once was. That doesn't make it any easier for those out of work (When I'm unemployed, for me the jobless rate is 100%.) But the only way to survive is to adapt. Like it or not, the niche markets and service sectors are where the jobs are heading.

[LS]

That was stated, I think, in yesterday's jobs report. This is traditional---employers don't hire people who have protections and benefits until they can be sure they won't have to turn around and fire them the next month, so they go part-timers.

[kaktuskid]

Since when do statisticians (the one who say the economy is improving) have party affiliations (most are independent agencies)

[y2k_free_radical]

THIS IS NOT,I REPEAT NOT,A JOBLESS RECOVERY---it's just all the jobs have gone to ASIA

[FR_addict]

Bump