Without jobs, recovery may stall
The U.S. economy, forecast to expand by at least 4 percent through the end of this year, may falter in 2004 as anemic job growth hinders consumer spending, economists say.
“Until you see job growth, this recovery has to be considered suspect,” said Paul A. McCulley, a managing director of Newport, California-based Pacific Investment Management Co., which manages the world’s biggest bond fund, with $110 billion. He was hesitant to say when hiring will increase or by how much.
The economy will need to add about 200,000 jobs a month on average to sustain the current pace of growth, said William Dudley, chief U.S. economist at Goldman, Sachs & Co. The United States has shed an average 56,000 jobs each month this year as companies such as Motorola Inc. fire workers and others including Eaton Corp. hold off on hiring.
“This has been a half-speed economy and now it’s shifting up to three-quarters speed,” said David Wyss, chief economist at Standard & Poor’s, the New York-based credit rating firm. “But unless we get job growth, I don’t think it’s going to have a lot of legs to continue growing rapidly.”
A survey by the National Association of Business Economics last week showed that 95 percent of corporate economists believe the United States has a chance to add 100,000 jobs during at least one month in the next two quarters, still below the reading Goldman’s Dudley says is needed to sustain growth.
Growth in U.S. gross domestic product may have accelerated to a 4.5 percent annual rate in the third quarter, almost three times as fast as in the first quarter, based on the median estimate in a Bloomberg News survey of 59 economists taken Aug. 28 to Sept. 9. Their mean expectation for the fourth quarter was for 4 percent annualized growth.
The pickup has been led mainly by consumer spending, which ultimately depends on job gains. Employment isn’t growing because companies have increased productivity, doing more work with fewer employees. The Federal Reserve said Tuesday it was concerned “the labor market has been weakening” and voted to hold its benchmark interest rate at 1 percent, the lowest since 1958, to spur the economy.
“The labor market is not responding to growth in the economy the way it normally does,” Fed Governor Ben S. Bernanke said at a speech Wednesday in Washington. While companies have been reluctant to expand, “it seems to us at the Fed that some of this gloom is fading, that firms are more willing spend on capital and expansion; we’re hoping that hiring will come soon.”
The ability of the United States to sustain growth and begin to add jobs has implications for President Bush, who will seek re-election in 2004, and for growth in other countries that depend on trade with the world’s largest economy.
So far, the United States has lost 2.7 million jobs since Bush became president, including 2.5 million in manufacturing. Unlike the so-called jobless recovery of 1991, the period since the last recession ended in November 2001 has been one of a “job-loss recovery,” Bernanke said at a Bloomberg News economics forum earlier this month.
‘Stop the bleeding’
“We continue to hemorrhage jobs, but the White House has no plan to stop the bleeding,” Sen. John Edwards, a Democratic presidential hopeful from North Carolina, said after the government reported that the economy shed 93,000 jobs in August.
A slowdown in the States would hurt Europe and Japan just as they are showing signs of a rebound. Their recoveries “are still very, very fragile,” said Howard Archer, London-based economist for Global Insight Inc., a forecasting firm.
The 15 countries in the European Union will expand by just 0.6 percent this year and 1.8 percent in 2004, based on the median forecast in a Blue Chip Economic Indicators poll. Japan may grow 1.4 percent this year and 1.3 percent in 2004, the Blue Chip survey found.
Companies such as Eaton, Motorola and DaimlerChrysler AG are trying to judge whether the economy is growing fast enough to support demand and the size of their work forces. Some chief executives are skeptical.
“We keep hearing the economy is going to get better, and now I’m not sure we’re going to see a pickup even by the end of this year,” Textron Inc. Chief Executive Officer Lewis Campbell told investors in a conference call Sept. 10.
Eaton Chief Executive Alexander M. Cutler sees his company’s business picking up going into the fourth quarter. That gibes with the Conference Board’s report that said its index leading economic indicators rose for a fourth straight month.
“A foundation is building for a gradual recovery,” said Cutler, head of the world’s second-biggest maker of hydraulic equipment, from his office in Cleveland. In the next year, orders for heavy-duty trucks in North America may rise by a third, and Eaton is boosting capital spending 30 percent.
Still, Cutler said he isn’t planning to step up hiring, saying there may not be many new jobs until at least a year from now. “Nothing’s on automatic at this point,” he said.
Gains in efficiency
Other companies are shedding workers to stem losses or increase productivity amid competitive pressures. Motorola, the world’s second-biggest mobile phone maker, is shedding about 3,000 workers this year. DaimlerChrysler, the world’s fifth-largest automaker, may close or sell as many as seven parts factories, people familiar with the plans said last week.
CEOs, economists and investors are divided over just when the U.S. labor market may improve.
“Because there have been so many false starts over the past two years, there’s a tendency to doubt that the recovery can be sustained,” said Milton Ezrati, senior economic strategist at Lord Abbett & Co., a 74-year-old money management firm with $46 billion in assets. “In truth, job growth always comes later in the cycle, and it’s going to be especially late this time because we’ve had such strong productivity growth.”
Cynthia Latta, principal U.S. economist for Global Insight Inc., sees U.S. payrolls growing by about 50,000 jobs a month in the fourth quarter, with new hires increasing to 200,000 a month by the end of the second quarter of 2004.
“Productivity can’t keep increasing at the pace it has, and therefore businesses will have to start hiring again,” Latta said in an interview last week.
Economists in the National Association for Business Economics survey released last week forecast that rising demand will prompt companies to boost hiring. Based on the median of 35 estimates in a poll taken Aug. 22 to Sept. 4, the group predicted that payrolls will rise by 1.2 percent in the fourth quarter and 1.8 percent in 2004.
About two-thirds of those in the survey said the economy will add 100,000 jobs or more during at least one of the next three months, and 95 percent said that would happen within the next two quarters.
Manpower Inc., the second-biggest supplier of temporary workers behind Adecco SA of Glattbrugg, Switzerland, said its survey of 16,000 companies found that 22 percent planned to add workers during the fourth quarter, the first time this year that the survey has pointed to a strengthening of the job market. The finding “marks a reversal of the downward trend” in U.S. hiring plans, Manpower Chairman Jeffrey Joerres said in a televised interview with Bloomberg News.
In some industries, a pickup in hiring already is evident. John Milligan, chief financial officer of Gilead Sciences Inc., said his company is actively recruiting and is encountering competition for workers. Gilead, based in Foster City, Calif., is the third-biggest U.S. biotech company by market value, behind Amgen Inc. and Genentech Inc.
“We’re seeing more people with multiple offers,” Milligan said. “I do sense a growing trend that more people will be hiring, spending more money and that bodes well for the economy.”
U.S. consumer spending and business investment have been rising, spurred by a $330 billion tax-cut package Bush won from Congress and by the lowest federal funds rate since 1958.
“The critical issue is what happens in the labor market,” said Edward McKelvey, senior U.S. economist at Goldman Sachs Group Inc. in New York, in a Sept. 4 interview. Without sustained job growth, “the economy is very much at risk of slowing down as these other stimulants fade,” he said.
Only so long
A recent study by the Federal Reserve argues that job losses this time are likely to be permanent, forcing fired workers to retrain so they can get positions in other industries and adding to the sluggishness in the U.S. labor market. That “may help explain the stalled growth in jobs,” the study says.
“Many industries are undergoing permanent rather than cyclical changes,” Federal Reserve Bank of Atlanta President Jack Guynn said in a speech in Florida. For that reason, public policies must “support worker retraining and make it easier for people to move on to new careers.”
“The expansion is becoming less academic and more tangible, although folks who are looking for jobs are still waiting to feel the improvement,” Guynn said. “I’ll know we are where we want to be when growth is reflected not just in some statistics but is felt broadly by the people that drive this nation’s economy.”