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Jobs May Start Growing Again Early Next Year—But Slowly

Job growth is likely to begin in early 2010 and improve slowly after that, though economists still expect the unemployment rate to remain around 10 percent for most of next year.

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Most forecasts are calling for the job losses—which have burdened the economy through the recession and into the recovery—to stop by the first quarter of next year.

That likely will be accompanied by another mildly positive reading in gross domestic product as the economy tries to dig out of this year's sharp recession.

Gains likely will come—as they historically have—in service-related industries as well as health care and manufacturing.

"The unemployment rate is likely to remain high. That's really the bottom line here," said Zach Pandl, economist at Nomura Securities International in New York. "We're going to have growth in employment, we're going to have growth in GDP, but the growth isn't going to be fast enough in our view to lower the unemployment rate quickly."

The Labor Department releases the November unemployment report Friday. Consensus estimates are for a drop of 120,000 in nonfarm payrolls and the unemployment rate to remain at 10.2 percent.

But current downward trends in job losses have most analysts convinced that the end is near.

Nomura actually is on the optimistic end in projecting job growth as soon as January, but most other economists are saying it could take as long as March before that occurs.

"I would probably think in the second half of the first quarter—sometime in February—we should see jobs growth actually beginning," said Peter Cardillo, chief market economist at Avalon Partners in New York. "Nonfarm payrolls will actually begin to grow, but at a very slow pace."

Even though the job-loss trend will be reversed, there will be little room for exuberance, economists say.

"It's important to remember that as soon as we get this first positive reading the debate is immediately going to turn to how robust the recovery is in the labor market," Pandl said. "We think there are some reasons for concern given our expectations for weak growth."

Because of the way the number is computed, getting the unemployment rate itself lower will be a prolonged battle.

The rate primarily measures people without jobs who are still looking for employment, and thus can be influenced by a variety of factors. For instance, discouraged workers coming back into the market will keep the rate high, as will the amount of new workers the market will have to absorb once the economy turns.

The actual rate of unemployed adults in the country—counting the underemployed, those working part-time who would rather be full-time, and discouraged workers—is 17.5 percent.

"What it's going to take in order to bring down the unemployment rate is job growth of 150,000 a month," said Tom Higgins, chief economist at Payden & Rygle in Los Angeles. "You have to absorb all the new entrants to the workforce, all those who have dropped out over the last couple of years because they couldn't find jobs. That's going to keep the unemployment rate sticky until the middle of the next year."

In fact, Higgins thinks the new low for unemployment coming out of this cycle will be 6 to 7 percent—high by recent historical standards and reflective of the series of problems that will hamper the labor market. And he said the rate likely won't get even that low for another four or five years. In the most recent prior recession, unemployment bottomed at 4.4 percent in March 2007 before turning.

As for what areas will lead the job market back from its depths, most economists cite the various aspects of the service industry.

Cardillo said some jobs will return to the manufacturing sector and said restaurants and technology also will be parts of the service sector that will gain. He doubts that real estate services jobs will rebound, though.

Pandl said retail will see growth as consumers start spending again, while Higgins forecasts health care to be a leader in the recovery.

Retail, in fact, could be the one wild card that thwarts the job-recovery theme.

"The most important thing would be if you had some kind of setback in financial markets which might hit confidence and discourage business from bringing on new hires," Higgins said, adding, "If the holiday season is very poor, then you're unlikely to see an inventory build that would spark new hiring."

Ironically, a spate of new hiring could be detrimental to the stock market, which has gained more than 60 percent even as unemployment soared from 8.1 percent in February to pass the 10 percent mark in October.

Stocks have gained as companies have trimmed labor costs and improved worker productivity. A reversal in that trend could give investors pause over the market's future prospects.

David Rosenberg, chief economist and strategist at Gluskin Sheff in Canada, said unit labor costs will begin to climb and perhaps take some lustre off the stock market.

Consumer Nation Holiday Central Edition
Consumer Nation Holiday Central Edition

"With that employment gain will come extra costs with no evidence that slack in the economy will subside enough to allow for top-line pricing power," Rosenberg wrote in an analysis. "In other words, be careful what you wish for if you have been bulled up on equities this year. Job creation may not be what you want to see."

Also, the Federal Reserve could use job growth as a green light to raise interest rates from their current floor of nearly zero percent. Higher interest rates would raise the costs of borrowing and strengthen the dollar, something that has been a pronounced negative for stocks during this year's rally.

"They're going to have to raise interest rates sooner than they've been predicting," Cardillo said.

However, he thinks the rate raise will be due solely to economic growth and not as a protective measure against inflation.

"I wouldn't be surprised to see a rate increase of about 25 to 50 basis points sometime in the first quarter. Once the Fed is convinced that we've peaked in employment, then I think we'll see a hike," Cardillo said. "Even if the Fed took interest rates form where they are now to 2.5 to 3 percent, I don't think it would hinder the stock market."