Why Job Growth Will Be Weak—And Painful—This Time

The aftershocks of the credit crisis will be a significant drag on job creation during the economic recovery, and those counting on a classic bounce-back may want to get a reality check from the housing and retail sectors.

“We haven't just gone through a business cycle, we've also gone through a major restructuring of the American economy," says Ken Goldstein, a labor economist at the Conference Board. “The workout from all of this will be very long and very slow. This is an awful lot to adjust to.”

This was reinforced Friday when the government reported that US employers unexpectedly cut 85,000 jobs in December, cooling optimism on the labor market's recovery.

In the case of the homebuilding industry, that adjustment could take until mid-2013, when the National Association of Home Builders expects production and employment to return to something resembling normal.

“In housing, we 're going through an abnormal cycle," says David Crowe, chief economist at the trade group. “We started losing jobs almost two years before the rest of the economy, in late ‘05, early ’06. We usually go in [top recession] first, but come out first. That’s not going to happen this time. We’re expecting weak job growth in general in 2010.”

The industry has already lost about a third of the 3.5 million jobsit had during the peak employment period of early 2006.

Employment in other parts of the housing/real estate industry shows a similar boom to bust pattern.

The number of members in the National Association of Realtors almost doubled during the 1998-2007 period, hitting 1.35 million in 2006. It’s down 22 percent since then. The NAR isn’t expecting existing home sales to return to their 2006 peak of 6.5 million units anytime soon. By 2011, they are forecast to hit 5.7 million.

Mortgage industry jobs doubled between the end of the last recession and early 2006 to 504,500, according to the Bureau of Labor Statistics. By October of 2009, about half had been lost.

“People saying ‘When are we going to get back to normal?’ Tell me what’s normal?” says Jay Brinkman, chief economist and SVP at the Mortgage Bankers Association. “Look at what drove the growth in past years. Easy credit, low interest rates, a low-risk premium, a combination of refinance, cash-out financing.”

Brinkman says employment levels will reflect that, as refinancing demand falls and borrowing criteria remain tough, and the lending market returns to more of a buyer-driven one. For one, there will be fewer mortgage brokers.

The housing correction will be felt far and wide.

“All of its attendant and ancillary production—appliances, carpeting, furniture—is not going to add to what is typical in a recovery,” says Crowe. Sales levels in some of those areas are at ten-year lows.

Retail Connection

“In the new cycle, there's a limit to how much companies can sell and make and therefore how many employees they can bring on,” adds Goldstein. “If the American consumer becomes a bit of a American saver, that bad news for some retailers, as well as some other folks.”

That’s already been the case, during 2008, when consumer spending contracted for two consecutive quarters for the first time in decades. Spending has rebounded somewhat, but it has been erratic, and certainly not reassuring for producers.

“We should not look for the retail sector to be a contributor to the jobs recovery as it was in other recoveries, “says Richard Hastings, who follows retail and real estate for Global Hunter Securities. The sector has matured. There are very high barriers to entry. You’re not going to get a fast-growing new retailer that would help create jobs.”

Hastings says job growth will also be dampened by narrower margins and enhanced productivity, thanks to technological improvements, affecting inventories, shipping and distribution.”

Retail’s contribution will be sorely missed. Between 2000 and 2007, the economy added 4.4 million retail jobs. Current employment in the sector—14.6 million—is back to its level of 1998.

Going forward, however, department stores alone are forecast to shed 159,000 jobs between 2008-2018, according to a recent Bureau of Labor Statistics analysis. Another

The job boom of recent years may hardly be coincidental. Retail and housing enjoyed something of a symbiotic relation during the credit boom.

“The structural changes are very important. Retail was an indirect source of jobs for real estate for years,” as national big-box store chains, and shopping centers sprouted up to serve new housing developments with hungry consumers. “When residential real estate story came to a crashing conclusion in 2006, that put an end to retailing growth story, as well.”

Hastings also points to an interesting symbiotic relationship between housing and retail during the boom-bubble period.

“The structural changes are very important. Retail was an indirect source of jobs for real estate for years,” as national big-box store chains, and shopping centers sprouted up to serve new housing developments with hungry consumers. “When residential real estate story came to a crashing conclusion in 2006, that put an end to retailing growth story, as well.”

“Some of those shopping centers in the high-growth markets of Arizona and California, where they were expecting the house tops to grow out to them, were stranded at it never happened, “adds Brinkman.