If you want to know why the recovery doesn't feel so good, especially among households, look at some recent numbers out of Washington. In the year ended in the third quarter, the economy has probably grown about 3%. Despite that solid pace, private-sector employment has dropped by almost 1.5 million jobs.
The dichotomy between economic growth and jobs illustrates the mixed blessing of the economy's elevated growth in productivity. Thanks to technological advances and revamped business procedures, profits are turning around and real wages of workers are rising. At the same time, however, companies can rely on productivity gains to generate the increased output needed to meet any modest rise in demand. So, until overall demand shows some real momentum, businesses will have little reason to expand their payrolls. No wonder consumer confidence is shaky.
The trend in productivity is why you should cast a wary eye at the unexpected 0.2 percentage point drop in the August unemployment rate, to 5.7%. Private-sector payrolls did not grow last month, and gains since May have been negligible. Typically, jobs have to grow more than 150,000 per month in order to cut into the jobless rate.
That could take a while, because little in the data suggests that real gross domestic product is ready to burst out of its 3% pace. And growth of that magnitude, while not at all bad, cannot generate gains broad enough to be felt across a wide swath of businesses and households. In fact, while some sectors may be growing at an impressive 4% or 5%, others are eking out gains of only 1% to 2% or making no headway at all.
That's why a lot of anecdotal reports in a 3% recovery tend to be negative or mixed. This pattern was evident in the Federal Reserve's latest roundup of regional economic activity. The report's overall tone was soft, but it was consistent with the Fed keeping interest rates steady at its Sept. 24 meeting.
THE UNEVENNESS OF THE RECOVERY also shows up clearly in the August job data (charts). The Labor Dept. said total nonfarm payrolls increased by 39,000 last month, and it revised up July's payrolls to show a gain of 67,000 instead of a mere 6,000. That was the best two-month gain since early 2001, but the government sector accounted for a large share of the hiring. On balance, only about 47% of all private industries surveyed by the Labor Dept. added to their payrolls in August. In periods of strong economic growth, that reading is well above 50%.
Recent job trends mostly reflect the ups and downs of various sectors. Thanks to the continued boom in housing, construction employment increased by 34,000 last month. But payrolls in manufacturing, where orders have flagged this summer, shrank 68,000. Private service-sector employment grew by 31,000, but retailers, who reported soft back-to-school sales, shed 55,000 jobs.
Temporary-help jobs increased by 51,000. Hiring of contingent workers is seen as a precursor to growth in full-time permanent jobs, so the August gain was a good omen for hiring. So was the six-minute increase in the average nonfarm workweek, to 34.1 hours. That's because businesses usually extend the workweek of their existing employees before they expand payrolls.
But so far in the third quarter, overall hours worked are running below their second-quarter level, indicating that, once again, productivity, not new jobs, accounted for any advance in the economy. Right now, economic growth is shaping up to be a lot better than many analysts feared in the wake of the summer stock market plunge. And if real GDP growth this quarter hits the current forecast of about 3%, then productivity for the quarter is on track to increase 3% to 4%.
WITH PRODUCTIVITY CONTINUING to provide all of the economy's growth, the drop in the August unemployment rate looks suspect, and it should not be interpreted as a sign that labor markets are improving. The unemployment rate is based on the Labor Dept.'s survey of households, in which readings on the labor force and employment tend to bounce around from month to month, unlike the more stable survey of business payrolls.
Since May, employment in the household survey has barely grown, and the labor force has actually shrunk. Neither trend suggests a recovering labor market. In addition, weekly claims for unemployment insurance ticked up over the course of August, suggesting the September jobless rate may well bounce back up toward 6%.
BUT DON'T LOSE SIGHT of the benefits that increased productivity holds for this recovery. In particular, it offers a win-win contribution to both profits and incomes. Thanks to the efficiency gains over the past year, employees with jobs have garnered pay increases in excess of inflation, while at the same time the exceptional productivity growth has enabled corporate profits to start moving up.
That was the news from the Labor Dept.'s Sept. 5 report on second-quarter productivity of nonfinancial corporations, considered a more reliable gauge than the nonfarm business data. The report showed that output per hour worked in that sector in the second quarter grew a bracing 6% from the year before, and businesses were able to slash their unit labor costs by 2.5%. Yet despite such severe cost-cutting, workers' real compensation still grew 2.1% (chart). Thus, the pain of cost-cutting is not hitting workers as hard as in past business cycles. The increase in real compensation explains to a large degree the resilience in consumer spending during and after the recession.
But corporations also benefited from the advance in productivity, since the 2.5% plunge in unit labor costs shored up profit margins even as prices in the sector fell 0.6% from a year earlier. Second-quarter profits of nonfinancial corporations--before taxes--increased 15.2% from their year-ago levels. When the recovery picks up steam later on, revenues earned from sales of more goods and services will go straight to the bottom line. And that's even if prices don't pick up. A little more pricing power that typically accompanies faster growth can only add icing to the cake.
To be sure, none of these trends in productivity and cost-cutting bodes well for a quick improvement in the labor markets. But the recent news on profits and real income means overall spending by businesses and households will continue to improve gradually in coming quarters.
And rising demand offers an important reason why job markets have probably stabilized. That isn't great news for the millions of job seekers, but slim job gains will at least make this upturn better than the "jobless recovery" after the 1990-91 recession. Back then, private payrolls headed south for a full year before businesses began to hang out "help wanted" signs.
By James C. Cooper & Kathleen Madigan
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