Why Job Creation Will Be 'Iffy' In The Coming Recovery
This is not your father's recession.
If domestic spending has been the engine of US economic growth in the past few decades, then the coming recovery — and the job creation that comes with it — won't be a smooth ride.
Much like the American auto industry, the broader economy is undergoing a sea change.
Consumer spending, which typically accounts for 70 percent of economic activity, has been so shaken that it will take years to recover. And even then, the growth will be slow and painful, with subpar job creation.
"The concern is that the magnitude of the downturn was so great and the structural issues so significant that you wouldn't look for a normal recovery," says John J. Castellani, president and chief economist of the Business Roundtable.
Castellani's outlook may not be among the most pessimistic. But it reflects the prevailing caution about how the austerity of consumers, business, and state and local government will keep a lid on spending and hiring.
"We believe that the painful adjustments to household and corporate balance sheets that are likely, given the excesses of the past, are enough to make the economic recovery a slow and tenuous one over the medium term," Morgan Stanley’s global economics team said in its Aug. 5 research note.
All of this points to an economic cycle that looks V-shaped on the way down and U-shaped on the way up — something of a first in modern times.
"The major sectors that have pulled us out before are not happening this time — housing, durables, exports," says economist Heidi Shierholz of the Economic Policy Institute.
And there was weakness in those sectors in Friday's generally better-than-expected unemployment report for July, which showed a loss of 247,000 payrolls and a slight drop in the jobless rate to 9.4 percent.
Revisionist History
For all the talk about the jobless recovery that followed the 1991 recession, the decade between that downturn and the one in 2001 created a staggering amount of jobs.
Though payrolls shrank for more than a year after the end of the 1991 recession, there were 22.7 million more jobs at the expansionary peak of February 2001 than the prior peak in June 1990. About 20 million off those jobs were in services, including 2 million in retail. Another 2 million were in construction.
By contrast, employment was just 5.6 million higher in the peak-through-peak period of 2001-2007. Though manufacturing shed jobs by the millions, construction payrolls jumped by almost 13 percent, or 875,000.
Many of those jobs are now gone. By the end of the second quarter, the economy had lost 6.5 million jobs. Construction payrolls are now lower than they were a decade ago.
"Retailers were already reducing the number of employees with a focus on productivity gains," says HIS Global Strategy economist Brian Bethune, who doesn't expect employers to hire back quickly. "This is the inherent risk of what we're toying with. Where are we going to get the sources of employment growth? If housing remains weak, services will suffer."
In the latest recession, consumer spending shrank for two consecutive quarters for the first time in half a century.
Based on June data, retail sales, which peaked in 2007, are now at a mid-2005 level. Spending on furniture and household furnishings is back to where it was in 2001. The building and garden materials category is at a five-year low; autos an 11-year low.
"We don't see the consumer as being a normal part of the recovery," says Richard Hastings, consumer strategist at Global Hunter Securities. Instead, the consumer will be "very much a lagging piece" of the recovery, because of the "threat of unemployment with the absence of housing market wealth effect and the debt overhang."
Between June 2007 and December 2008, inflation-adjusted personal wealth fell by 22.8 percent — the most since the Federal Reserve began collecting data almost 60 years ago. Some $6 trillion in housing wealth alone was lost in 2008.
"When wages and salaries in the private sector are deflating you are really in a difficult situation," observes Bethune. "I don't see how you can move to any kind of strong recovery."
Consumer confidence as well as disposable income are critical to sustaining demand, which is a precondition to companies increasing output and eventually adding new employees.
"When we talk about a sustained rebound in employment, that's going to require a pick up in demand of all goods," says Mickey Levy, chief economist at Bank of America, who might be described ad a borderline optimist. "And we're not there yet."
Though companies may have over-reacted when they were slashing jobs in the wake of the Lehman Brothers failure, it's unlikely to mean any short-term correction.
"Even though companies have cut a lot, there is still some capacity," Tig Gilliam, CEO of Adecco North America, the job placement firm, told CNBC.
Companies are also cutting costs by slashing their own spending on goods and services.
"In this austerity mode, the first wave is the corporations that have cut back on contractors, vendors, travel," says Bethune. "That keeps happening as corporations keep moving up the tree from the low-hanging fruit until their baseline costs are more aligned with final demand."
Business and professional services, such as IT support, which are often outsourced by big companies, have suffered, say experts. The ISM survey for June reflects such conditions and trends.
"You're not going to see the kind of capital expenditures and investment to have the whole supply chain moving along with you," adds Castellani.
Cash-strapped state and local government are doing much the same as they struggle with budget deficits. Work outsourced to private contractors gets cut in an effort to save payroll positions.
"I don't think we're going to see a rapid pace of demand growth," says Steve East of Height Analytics. "We don't have private sector credit creation anymore and that's different in this recovery than past recoveries. In past recoveries lower interest got people to lever up more and household balance sheets lever up more."
Household mortgage debt decreased in 2008 for the first time since the Federal Reserve started issuing reports 35 years and has fallen four straight quarters though the first quarter of 2009. Consumer credit has fallen two straight quarters as of the first quarter of this year.
That sort of demand environment does not bode well for job creation, especially small business, which generates the majority of jobs.
Right now companies that need to increase output are adding to the workweek of current employees or hiring temporary workers. Hiring for full time positions usually lags by six to 12 months, according to experts.
"Even if they come back into the market, they're going to come in a little more slowly than they have to hire people in past recessions," says Gilliam.
Castellani of the Business Roundtable says hiring "will be a little more iffy than usual" because of doubts about the strength of the recovery.
Conference Board economist Ken Goldstein also expects a slow recovery but doesn't subscribe to the consumer slump, jobless recovery scenario. He says job growth — once it gets going in 2010--will average to 150,00-175,000 a month, but that is well below the quarter of a million average of the 1990s boom.
"There may be fewer clerks behind the cash register at the mall," says Goldstein, but jobs will appear as the economy grows and evolves. "The jobs that will be there may not be the jobs that are there right now. There are always new services."
Right now, the new force in the labor market is the federal government. By some estimates, the $789 billion stimulus package is creating 200,000-250,000 jobs a month. If so, that would put it on track to fulfill the Obama administration’s goal of saving or creating 3.5 million jobs, which is about 2.7 percent of the total payrolls as of June.
Many of the plan’s initiatives — from tax rebates to the cash-for-clunkers program to a homebuyer credit — are conventional tools meant to spur consumption, particularly of durable goods.
"The government is our spender of last resort," says Shierholz.