WHICH WILL GET OUT OF THE CELLAR FIRST: THE ECONOMY--OR THE YANKEES?
Last fall, many economists expected this recession to be on its way out by opening day of baseball season. Well, it's one month into the campaign, and the economy is still in a downturn. Now, the question seems to be: Will the recovery show up by the All-Star break in July or not until the World Series in October?
The recession is showing the staying power of Nolan Ryan. But unlike the 44-year-old Texas Ranger pitcher, the economic contraction seems to be losing some of its momentum. The April employment report offered some signs that the economy's rate of decline is slowing. The unemployment rate slipped to 6.6% last month, down from 6.8% in March. And nonfarm industries shed jobs at a much slower rate than in previous months.
Even so, this economy has a lot of strikes against it. Companies continue to cut payrolls and work time, cars sales are a disaster, and corporate profits remain bleak. All these factors suggest that the economy remains mired in recession.
The only consistently bright spot among all this bad news is the outlook for inflation. A gain in productivity in the nonfarm sector and moderation in wage growth indicate that price increases will shrink during the course of the year. That should lower long-term interest rates--a necessary ingredient for recovery.
To be sure, the April labor report scored some hits for the economy. Nonfarm employers cut 124,000 jobs last month, many fewer than the 221,000 averaged during the previous six months (chart). And 44.7% of the 356 industries surveyed increased employment in April. That's up from just 36.9% in March.
Factory employment dropped by 42,000 last month, an improvement from the 93,000 workers laid off in March. Auto makers called back 13,000 workers in April, after inventory problems caused some plant closings in March.
In the service sector, 58,000 employees were handed pink slips, mostly in retail trade. But business services expanded their payrolls last month for the first time since September, while finance companies added workers following eight months of declines.
The most surprising news in the April report was the decline in the jobless rate--the first drop in nearly a year. But the Labor Dept. reported that much of the decline was due to a jump in workers classifying themselves as self-employed. Even Labor analysts considered the increase suspect, and it is very unlikely to be repeated in coming months. That means the unemployment rate should rise again in May.
The April data also showed that the economy has almost as many problems as the last-place New York Yankees. A slowdown in layoffs isn't always a sign that the economy has hit bottom. And the April layoffs bring the total number of jobs lost to 1.6 million since July. That's not much different from the 1.4 million pace of layoffs in the first nine months of the 1981-82 downturn.
In addition, the workweek fell in April--another indication that there is too little business to keep employees busy. Workers spent 34.1 hours on the job, down from 34.2 in March and 34.7 hours in June. A rise in the workweek will be one of the first signs of recovery, because when demand picks up, companies increase the hours of current workers before hiring new employees.
A shorter workweek, together with April's job losses, means that the total number of hours worked in the nonfarm economy started this quarter at a 2.6% annual rate below its pace of the first quarter. Since hours worked is a good proxy for economic growth, the low level of aggregate work time suggests another drop in this quarter's gross national product.
The factory workweek did rise in April, to 40.2 hours from 40.1 in March. But most of the advance was in the auto sector. The increased activity at carmakers suggests that industrial production will post a small increase for April, after declining for six months in a row.
Detroit's April rebound, however, isn't sustainable. Consumers just aren't buying cars. In April, new domestically made autos sold at a ghastly 5.5-million annual rate--the lowest level in 8 1/2 years (chart). Auto makers will probably have to scale down already modest production plans for the rest of this quarter or risk another serious buildup in inventories. That means output and jobs in the auto industry will fall back again in May.
Unemployment isn't the only hardship facing workers, though. The recession is also shrinking their pay raises. The average nonfarm wage grew by 0.5% in April, to $10.29 an hour. Part of the gain, however, reflected the rise in the minimum wage to $4.25 an hour, from $3.85. Since that boost won't be repeated in May, this month's wage hike won't be nearly as robust as April's.
Over the past year, nonfarm wages have grown by just 3.3%, down from their 3.8% pace of last April. Both manufacturing and service pay are rising moderately. Since wage growth puts a floor under inflation, smaller wage gains are brightening the price outlook.
But smaller pay hikes, along with a shorter workweek, mean personal income will continue to suffer. So, consumers can't boost spending--a requirement for recovery. In fact, consumer buying probably won't rebound until the job markets stabilize and pay gains pick up.
Weak wage growth and hiring also explain why consumers are cutting back on borrowing. Installment debt outstanding hit a record high in November and has fallen in each month since then (chart). In March, such debt dropped by $931 million. Excluding the credit-control period of 1980, installment credit hasn't fallen for four straight months since the 1958 recession.
With job prospects still shaky, households will likely concentrate on paying gff existing debts rather than taking on any new borrowings. Already, consumer debt as a percentage of disposable income was down to 18.2% in March, after rising to nearly 19% in mid-1989.
The sweep of recession goes beyond the usual cast of characters, such as hiring, retail sales, and car buying. Productivity also suffers in a downturn, because output drops much faster than businesses can cut payrolls. But efficiency seemed to improve in the first quarter, suggesting the companies responded very quickly with pink slips when demand started to sag.
Output per hour worked in the nonfarm business sector rose at an annual rate of 1% in the first quarter, after falling 0.7% in the fourth quarter. The gain in first-quarter productivity, combined with the moderation in wages and other labor costs, caused some improvement in the growth of unit labor costs. They rose at a 3% annual rate last quarter, down from a 4.7% increase in the fourth quarter, and from a 5.3% clip a year earlier.
All of the first-quarter gain in efficiency seemed to be in the nonmanufacturing sector, particularly service industries. Factory productivity fell at a 0.9% annual pace last quarter, after dropping by 1.3% in the fourth period. Unit labor costs in the manufacturing sector are up by 2.7% from a year ago, a jump from their 1% yearly pace in the first quarter of 1990. But factory productivity should rebound when demand recovers, and that should reverse the upward trend in unit costs.
An improvement in labor-cost growth will be a tonic for companies struggling with poor earnings. BUSINESS WEEK's scoreboard of 900 corporations shows that their combined first-quarter profits were down 9% from a year earlier (page 66).
And based on the Commerce Dept.'s initial reading of the economy, BUSINESS WEEK estimates that book profits for the entire corporate sector fell by about 4% in the first quarter, to a $291 billion annual rate. Earnings were depressed by swings in inventories. Operating profits appear to have risen by 2.7%. But at an estimated $296.7 billion, earnings last quarter were flat from a year ago.
Companies will need a recovery to bail them out of their profit decline. And workers require an upward shift in demand so that companies can start hiring again. The question is when. The average postwar recession has lasted 11 months--a length this downturn will reach in June. Right now, however, this recession is headed into extra innings. And a recovery's appearance will probably be closer to October than to July.KATHLEEN MADIGAN