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MORE JOBS--BUT THEY'RE NOTHING TO GET WORKED UP ABOUT
The latest readings from the labor markets offer a mixed bag of pluses and minuses for the economy. On balance, the job data suggest a continuation of moderate economic growth in the third quarter, with improving prospects for the fourth.
The September report on the labor markets shows that payrolls are growing, but that new jobs are lacking in both quantity and quality, compared with past recoveries. Sectorally, manufacturing employment remains in a 41 2-year slide, while a handful of service industries continues to generate most of the new openings (chart).
And regionally, job markets are improving in some states, such as Massachusetts and Michigan, where the recession hit hard, but California is still suffering (table). California, which slipped into recession well after the states in the Northeast, remains a big drag on the national labor markets. In fact, job growth in the state will rank 50th in the country through 1994, according to projections by DRI/McGraw-Hill Inc. California makes up 12% of the U.S. labor force.
Even though the labor markets still lack the zing of past recoveries, productivity gains continue to generate a greater-than-usual share of the economy's output growth. Hours worked rose at an annual rate of just 1.5% in the third quarter, down from 4.3% in the second, suggesting that productivity rebounded from its poor first-half showing. Service-sector productivity appears to have bounced back, while factory efficiency posted another stellar gain.
Measured by real gross domestic product, however, third-quarter economic growth is shaping up to be a mixed bag as well. In particular, the Commerce Dept. estimates that the Midwest floods and Southeast drought reduced farm income by some $35 billion in the month of July, and that figure reflects only crop damage and uninsured business losses. The total impact, including a depletion of grain and livestock inventories, was larger. Economists at Merrill Lynch & Co. estimate that the total farm-sector drain on third-quarter GDP could approach 2 percentage points.
Where the economy shows buoyancy, though, is in the strength of domestic demand. Solid third-quarter growth in consumer spending, equipment investment, and residential construction is reducing inventories--especially of cars--and setting up a rebound in output, which could give fourth-quarter GDP a big boost.
If so, job growth is due for a lift out of its recent humdrum performance. Industries added 156,000 workers in September--good, but not great--following a loss of 41,000 jobs in August. The two-month net gain was the smallest in a year, and there is some question about the strength of the September increase.
That's because private-sector employment, excluding government, expanded by a mere 85,000 workers. Jobs on public payrolls ballooned by 71,000, led by a 54,000 increase at the local level. One explanation: Seasonal adjustment gave government jobs a boost because the survey was taken later than usual, giving teachers time to return to the classroom. If so, government employment will be a drag on October jobs.
As usual, service producers generated all of the September gains, while manufacturing accounted for the weakness. In fact, since the recovery began in March, 1991, four service industries--temporary help, health, restaurant, and social services--have accounted for all of the growth in payroll jobs. In September, these four made up less than 18% of all nonfarm employment.
During the past year, their contribution to job growth has diminished to a still-high 54%, as other service industries have increased their hiring. The job-weighted average hourly wage in these four categories, however, stood at only $8.74 last quarter, compared with $10.16 for all services and $10.84 for the entire nonfarm sector.
Temporary help is one of the fastest-growing employment sectors. In the third quarter, such temporary jobs were up 16% from a year ago, compared with a rise of 1.6% for all payrolls. Employers, especially retailers, are increasingly using temporary help to avoid paying the costly benefits they would have to incur when using full-time workers.
Temporary workers are also more prevalent on the factory floor. Because these workers do not show up on payrolls, the use of temporary hires suggests that factory jobs may not be dropping as quickly as the Labor Dept.'s numbers indicate. Moreover, the readings on productivity are skewed in favor of manufacturing because, although the temps are producing factory goods, their work time is counted as part of the service sector.
Still, the U.S. economy cannot be considered strong until factories start hiring permanent workers. Manufacturers handed out 18,000 pink slips in September, dropping their payrolls to the lowest level since 1965. One small consolation is that the factory losses have been getting smaller in recent months, and the workweek and overtime remain at historically high levels.
With hours stretched so thin, though, and with factory inventories so low right now, additional output in the fourth quarter may well require more people. That's especially true in the auto industry, which has scheduled the strongest quarterly output in five years.
The changing composition of jobs is why wage growth has fallen back to a sluggish pace. While the wages of factory workers are being lifted by overtime, the addition of relatively low-paid service workers means that pay gains in that sector continue to slow (chart).
In September, for example, the average hourly wage earned by nonfarm workers was unchanged, at $10.86. Declines in all major service categories--from retail trade to finance--offset the 0.6% rise in factory pay. In addition, because the nonfarm workweek dropped by 18 minutes, weekly pay fell 0.9% in September, suggesting that last month's growth in personal income was weak.
Still, the one-month setback doesn't seem to be an impediment to consumer spending. Income growth was solid enough in the preceding months to keep shoppers in the stores in September. And the Johnson Redbook Report, published by Lynch, Jones & Ryan Inc., says that department- and chain-store sales in early October were up 1.2% from their September average.
One reason for the continued rise in consumer outlays is that credit cards are back in style. After being an economic pariah for two years, consumer borrowing has made a very strong reappearance. Installment debt rose $3.63 billion in August, after July's $5.04 billion increase. Both advances were led by sharp gains in credit-card and other revolving debt. Consumer credit outstanding now stands at a record-high $761.1 billion (chart).
But the onslaught of plastic is not a danger to the outlook. That's because--unlike the late 1980s--borrowings are rising in line with income growth. Even with its recent jump, installment credit outstanding as a share of disposable income has remained near 16.1% for more than a year.
Clearly, households are borrowing at a pace that can be comfortably covered by their monthly budgets. So any future increase in income will likely be matched by more credit use--a good sign for retailers as they stock their shelves for the holiday shopping season.
A healthy increase in consumer spending would certainly wipe out the mixed-bag quality of this 21 2-year-old expansion, especially if the advance translates to improved hiring and industrial output for the rest of the year. Add in the lifts from capital spending and home construction, and the U.S. economy begins to look less like a sow's ear of conflicting signals and more like a silk purse of solid growth.JAMES C. COOPER AND KATHLEEN MADIGAN