Business Outlook: The Signs Say Job Growth Ahead
The most important factor is the economy's return to growth. Economists increasingly expect real gross domestic product to continue to expand at an annual rate near the third quarter's 3.5% pace as overall demand continues to stabilize, businesses restock their exceptionally thin inventories, and financial conditions improve. A growth rate above 3% over two or three quarters has never failed to generate at least modest increases in payrolls.
Recent trends in two indicators that can foreshadow upturns in payrolls—weekly jobless claims and temporary employment—look especially encouraging. After declining since April, the four-week average of first-time claims fell to 524,000 at the end of October, the lowest since the beginning of the year. More important, given current labor market conditions, economists at JPMorgan Chase (JPM) say a level of claims close to 500,000 per week is consistent with stable payrolls, a threshold likely to be reached in coming weeks.
In addition, temp jobs have risen for three months in a row, including a 34,000 increase in October. Temps tend to be the first fired in downturns and the first hired in upturns, since the cost of laying off and adding full-timers is much greater. The 44,000 rise in temp payrolls since July is similar to the pace after the last two recessions, when overall payrolls had either stabilized or begun to increase.
Despite these upbeat trends, payrolls have been restrained by near-record productivity growth. Last quarter, nonfarm businesses increased their output by 4%, even as they slashed hours worked by 5%. The October job report suggests the pattern of rising output and falling hours continued into the fourth quarter.
The 8.2% annual rate of productivity growth over the past two quarters, however, is not sustainable. Existing workers and facilities cannot continue to be stretched to that extent in an economy that is growing by 3% to 4%. Much of the recent surge likely reflects a combination of extreme cost-cutting and a surprising third-quarter pickup in demand. As output keeps rising, more workers will be needed.
Some observers worry about a repeat of the experience after the 2001 recession, when productivity gains carried economic growth, even as employment kept falling for 21 months into the upturn. Back then, however, sagging payrolls mainly reflected the recovery's poor 1.9% first-year economic growth, the weakest on record, not the 3.1% pace of productivity. Productivity growth is all but certain to recede toward its 2.2% trend of recent years, a pace that would leave room for job growth sufficient to reduce the unemployment rate gradually next year.
In the meantime, the upside of the surge in productivity is robust profits, which will support business expansion in coming quarters. So far this year hourly wages and benefits have been about flat. Adjusted for productivity, though, labor costs per unit of output have plunged at a record 5.4% annual rate. Companies have the need to expand as demand picks up: Inventories have been liquidated at a record rate, and business equipment is wearing out faster than it is being replaced.
A return to job growth will be the linchpin of a sustainable consumer-led recovery. But keep in mind that consumer spending is already increasing, even as payrolls shrink and the jobless rate hovers at 10.2%. That's the result of spending by those still employed. And if recent upbeat signs from the labor markets are right, income growth should pick up in coming months.