True, the small increase of 56,000 in nonfarm payrolls in September hardly marks a decisive break of the seven-month downtrend -- the missing piece of the puzzle in the otherwise consistent pattern of accelerating U.S. output growth. But the swing into positive territory has decisively changed the outlook for the coming months.
BEYOND EXPECTATIONS. With payrolls now growing again, and data for the factory sector finally showing an unambiguous pattern of accelerating growth, the burden of proof is shifting toward the naysayers -- the economists who maintain their forecasts of ongoing labor market sluggishness.
To be clear, the nonfarm payroll gain in September is hardly statistically significant, though the upward revision to the August data left the employment figures roughly 100,000 stronger than the market was expecting. And it would have been nice to see a rise in the workweek from the anemic level of 33.7 hours worked in August, which itself is only slightly above the 33.6 cyclical low in July. Hours worked actually contracted at a 0.9% rate in the third quarter overall, despite the huge 6% growth rate we at MMS expect for inflation-adjusted gross domestic product for the period.
Indeed, this suggests that rapid productivity growth for the labor market is actually worsening -- leaving a stellar nonfarm productivity growth rate of 7.2% in the third quarter that will exceed the second quarter's eye-popping 6.8%.
WORKING OVERTIME. The data from the establishment (i.e., factory, mine, store, or office) survey the Bureau of Labor Statistics conducts remain in stark contrast to the extraordinary strength evident in the U.S. statistics for aggregate demand that the Commerce Dept. releases. What's behind the discrepancy? The explanation is somewhat limited to the New Economy theories that have been associated with the productivity renaissance that began in the late 1990s.
Some economists held out hope that an upward revision in payroll statistics for the past several months would help close the gap between extraordinary output growth and the sluggish labor market data from the establishment survey. But the BLS's announcement that the next payroll benchmark will likely leave a net downward revision of approximately 145,000 in the March, 2003, level of payrolls, rather than the 600,000 upward revisions expected by many, means those annoying New Economy theories will remain in play for now. In fact, the gap is not likely to be meaningfully closed by revisions in the foreseeable future.
However, the factory data in the report did suggest that the gap will at least now start to be closed with accelerating job creation and hours worked, bringing the unusually long delay in the cyclical turning point for the labor market to an end for this cycle. The rate of decline in factory employment moderated to 29,000 in September, the smallest drop in this sector since July, 2002. The workweek for the factory sector rose by 0.2 hours, to 40.4, while overtime hours rose by the same amount, to 4.2. The gains were widespread across the sector, though the auto industry bounce-back from the blackout-distorted August production pace led the charge.
PLEASANT SURPRISE? Given this firm rebound, combined with other factory data indicating accelerating order and shipment activity and plummeting inventories relative to sales, it appears the best guess for the future is that the factory sector is poised for a solid run of accelerating activity necessary for output to keep pace with sales.
We at MMS International are more comfortable projecting monthly payroll gains of 50,000 to 100,000 through the remaining months of 2003, with bigger gains of 150,000 to 200,000 in 2004. This translates to a moderation in productivity growth to 4% in the fourth quarter and 3% in 2004 overall, as should be expected as the expansion matures.
The bottom line: Unless GDP unexpectedly slows sharply, it appears that payroll growth has returned to the positive side of the ledger. A big pop in at least one of the months of final quarter of the year is even possible. Englund is chief economist for MMS International