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Jobs growth still lagging economy

Can the U.S. economy sustain a decent recovery even without strong job growth? Maybe, say economists. By Martin Wolk
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Despite last week’s encouraging news that the economy added jobs in September for the first time since February, few forecasters expect any significant growth in employment over the next six months. That may be distressing to job seekers and current workers concerned about their prospects, but economists believe the latest wave of economic growth is sustainable even without the long-awaited surge in employment.

As the third-quarter earnings season gets under way in earnest next week, analysts are expecting the strongest corporate results since the tech boom peaked in early 2000. Of the 43 companies that have reported results so far, led by Yahoo!, General Electric, Costco and Alcoa, only two relatively smaller firms have fallen short of expectations, said Joe Cooper of Thomson First Call.

Overall, the nation’s biggest companies should post earnings that are on average 20 percent higher than last year’s third quarter, which would be the best showing since the second quarter of 2000, according to Thomson First Call’s estimates. And the current fourth quarter could be even stronger, with early estimates putting earnings at 22 percent ahead of year-ago levels.

But after the collapse of the bear market in 2000, the terrorist attacks of 2001 and the corporate scandals of 2002, corporate executives are understandably cautious and unlikely to be talking much about hiring plans in the upcoming round of conference calls.

Chief executives of major corporations meeting this week at the Business Roundtable in Washington expressed optimism about the economy but generally said they were satisfied with the current size of their work force, said Joseph Quinlan, chief market strategist for Banc of America Capital Management.

“If you are a CEO and you’ve just been through three years of hell, you’re going to want to build up some cash in your coffers before you start adding workers,” Quinlan said.

Nearly two years after the end of a relatively mild recession, some companies finally are beginning to add workers, according to the latest data.

Temporary employment, considered a reliable precursor of permanent hiring plans, has risen for five straight months, according to the September employment report. The manufacturing sector, while still shedding jobs, also showed some improvement by boosting the average workweek and overtime hours. Initial claims for unemployment benefits, while volatile, have been trending lower and this week hit their lowest level in eight months.

But Quinlan and other analysts do not expect steady monthly growth of 100,000 to 150,000 jobs until next spring, and that is considered the minimal level needed to absorb new entrants into the work force.

In addition to caution on the part of corporate executives, a significant factor behind the slow job growth is the growing inclination of businesses to shift work overseas, taking advantage of what Morgan Stanley chief economist Stephen Roach dubs “global labor arbitrage.”

In a note published this week, Roach explains that several major trends have converged to drive the continued outsourcing of jobs overseas, including the improved manufacturing infrastructure in countries like China, the emergence of the Internet as a pipeline for delivery of services and a lack of pricing power that has forced businesses to be ruthless about cost-cutting.

Quinlan adds that many companies are expanding their facilities in China and India not only for the cheap labor but because the world’s two most populous countries are where they expect to find future demand for their goods and services.

Roach points to GE as a leading example of the trend, saying the company has publicly stated it has a goal of “70-70-70,” outsourcing 70 percent of its headcount, with 70 percent of the outsourcing going outside the United States, and 70 percent of that portion going to India. Currently GE employs 16,000 people in India out of a global total of 313,000, Roach said in his note. “This suggests such an arbitrage is only in its infancy,” he said.

GE officials were not immediately available for comment on the report. (MSNBC is a joint venture of Microsoft and NBC, which is owned by GE.)

While strong job growth generally accompanies the end of a recession, leading to a virtuous cycle of increased demand and increased production, the corporate sector can contribute to extending the recovery in other ways.

“Jobs are important, but a sustained economic recovery is possible if slow job growth is combined with solid increases in other forms of corporate outlays,” said Ethan Harris, chief U.S. economist for Lehman Bros.

There are signs that is exactly what is happening as rising earnings, increased business confidence and new tax incentives fuel an increase in spending on capital improvements, particularly high-tech equipment that helps boost productivity.

Investment outlays on information-processing equipment and software rose at a 16 percent rate in the second quarter and likely will continue growing next year due to provisions in the massive tax-cut package signed into law this year by President Bush, Quinlan said. And such high-tech spending tends to stay here in the United States, he said.

“When it comes to investing in capital equipment to help maintain production efficiencies, companies will spend a little bit more in the U.S.,” he said, “but when it comes to adding a worker, that worker may be abroad.”

If extended to its logical — or illogical — conclusion, the trend toward outsourcing would lead to a nation of jobless consumers entirely reliant on products and services from abroad, but few economists worry about such a dark future.

“One thing the United States does better than any other country in the word is regenerate growth in different sectors, different industries, different cities,” Quinlan said. “I wouldn’t underestimate the resiliency and flexibility of the U.S. labor force, particularly compared with anywhere else in the world.”