Job growth still the missing link

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Boosted by tax cuts and low interest rates, the economy has gained impressive momentum in recent months, growing even faster than many optimistic projections. But job growth continues to lag badly, and economists expect only modest improvement in employment when monthly figures are reported Friday.

Many analysts believe the economy added jobs last month for the first time since January, while others look for yet another negative report. The unemployment rate is expected to remain unchanged at 6.2 percent. A better-than-expected report could boost the stock market, but nobody believes the economy will go back anytime soon to creating 150,000 jobs a month, the level needed just to absorb new entrants to the work force.

“It’s clear that businesses have stopped cutting, but there is as yet no evidence that they have started to hire,” said Mark Zandi, chief economist at, a forecasting firm.

Except for the frustrating lack of new jobs, the economy clearly is moving in the right direction. Retail sales rose in July at their fastest clip in four months, led by auto sales, which surged even higher in August. Businesses have picked up their spending pace too, with orders for non-defense capital goods up at an 18 percent rate over the past three months, according to John Silvia, chief economist for Wachovia.

Silvia now expects gross domestic product, the broadest measure of economic output, to rise by 5.5. percent this quarter, which would be the fastest pace since the peak of the technology bubble in late 1999.

But on the labor front, the picture has been decidedly mixed. Initial claims for unemployment insurance have been hovering around 400,000 a week and went back above that level in the latest report Thursday. Nearly 3.7 million people are collecting unemployment insurance, a figure that has been rising in recent weeks.

The Institute for Supply Management, which produces closely watched business surveys, reported Tuesday that manufacturing is expanding, but only 12 percent of respondents said they were expanding their work force, while 21 percent said they were still cutting jobs.

“So far this is all encouraging and this is all very hopeful, but it will quickly become meaningless unless businesses respond by starting to create some jobs,” Zandi said. “If we don’t get job growth, the economy will fade again.”

Ed McKelvey, senior economist at Goldman Sachs, pointed out that the economy has been expanding for more than 18 months since a relatively mild recession ended in late 2001. “Usually you would have had lots of job growth by this time,” he said.

Instead, the economy has continued to lose jobs, including 800,000 since the recession ended. In a paper published last week, economists at the Federal Reserve Bank of New York said that the problem is not so much layoffs as lack of job creation, reflecting a high degree of corporate uncertainty and financial market weakness.

“Companies are working in a revenue-constrained environment, and they feel like they’ve got to get more out of an existing work force,” said McKelvey. And they are succeeding: Productivity rose another 6.8 percent in the second quarter, according to revised figures published Thursday.

But employment also is being held down by structural changes in the economy that first became apparent in the jobless recovery of 1991-92, said the Fed researchers.

In past recessions, the researchers argue, most job losses were temporary furloughs, meaning that employment snapped back quickly when demand rose. The latest period has seen a dramatic rise in the number of industries experiencing so-called structural losses, including telecommunications, electronic equipment, aviation and securities.

“The largely permanent nature of this recession’s job losses could explain why jobs have been so slow to materialize,” said the researchers, Erica L. Groshen and Simon Potter. “An unusually high share of unemployed workers must now find new positions in different firms or industries.”

On the other hand normally cyclical industries like housing have held up remarkably well in the current downturn, perhaps reflecting the Fed’s ability to better manage monetary policy by driving down interest rates.

Silvia, of Wachovia, sees signs that the employment market is finally improving, and he said Friday’s report should reflect positive technical factors including returning military reservists and better weather.

But Don Straszheim, who is generally optimistic about the economy, cautions that the economic expansion likely will continue to be relatively modest, offering only modest job growth.

“One of the things that is special (in this recovery) is the increasing competition from abroad, and in particular from China,” said Straszheim, of Straszheim Global Advisors. “I believe the economic issue in America for the rest of this decade is going to be job losses to overseas, and in particular to China.”

He stressed that rising global trade is generally good for the economy, driving down the cost of consumer goods and boosting the standard of living. But he added: “If you lose your job to China, you lose your whole job, and it hurts.”