Signs of a Jobs Recovery
By Steve Hine
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While job growth has been slow since the end of the recession, the stage may be set for businesses to begin significant hiring.
April 2011 marked the 22nd month of the recovery since the Great Recession of 2008 and 2009. In some respects the nation has rebounded nicely from the longest and deepest downturn since the Great Depression.
After declining by $554 billion (4.1 percent) between fourth quarter 2007 and second quarter 2009, real gross domestic product (GDP) since then has grown by $571 billion (4.5 percent). Here in Minnesota personal income (the closest measure to GDP available quarterly at the state level) dropped by 3.7 percent during the recession but has since (through fourth quarter 2010) bounced back 4.9 percent. So our economy, both nationally and locally, is producing more now than before we went into recession.
Furthermore, goods and services aren’t going unsold. Inventory-to-sales ratios are as low (manufacturing and trade ratio of 1.24 in February 2011) as they have been since 1992. This is important, as it suggests that further increases in demand will likely be met with higher production rather than drawing down inventories. And real final sales surged 6.7 percent in the fourth quarter last year — the largest increase since 1998.
All of this production and purchasing is also serving bottom lines. Corporate profits in the third quarter last year were up 77 percent over their low point in the fourth quarter of 2008, and they are at their highest level ever with the exception of the 2006 third quarter.
So we have expanding production, strong sales, and near-record profits. But despite full recoveries in production and profits, we have regained only one-seventh of the jobs lost during the recession. Why aren’t businesses hiring workers at correspondingly high rates?
Part of the reason is that businesses haven’t had to. Their remaining workers have been able to meet rising demand. Over the past two years, labor productivity has increased 8.5 percent, allowing the production of 4.4 percent more goods and services with 4 percent fewer workers. Productivity always spikes as the economy enters recovery. On a year-over-year basis, productivity hit 6.7 percent in the first quarter of 2010, 6.1 percent in 2002, 4.3 percent in 1992, 5.4 percent in 1983, and 4.6 percent in 1975. In each of those cases, productivity then dropped off, creating the need to hire to meet continued rising demand. Following the 2001 recession and during the jobless recovery that followed, productivity growth didn’t fall below its long-run average of 2.3 percent per year until the last half of 2004. But when it did, we began to average job gains of more than 200,000 a month.
So if experience is any indication, more output with less labor should eventually reach its limits. In the three quarters since annual productivity growth hit 6.7 percent in the U.S., it has fallen to 4 percent, 2.9 percent, and 1.9 percent, respectively. Perhaps coincidentally, job growth nationally has averaged about 200,000 over the past two months.
The confluence of these various trends — strong GDP growth that is expected to continue, strong sales and lower inventories, and productivity that has peaked and now waned — strongly suggests that employment growth is soon to follow. Indeed, we have been tracking various leading indicators of improved labor markets for some time.
On the layoffs side of the equation, it is clear that businesses are no longer shedding their workforces the way they were during the worst of the downturn. New claims for unemployment benefits — a strong indicator of involuntary layoffs — were down in Minnesota from a peak of 43,750 in May 2009 to 25,250 in March, a 42 percent decline. Nationally, new claims have fallen below the 400,000 per week threshold, a level frequently used to distinguish job creation from elimination, after being as high as 651,000 the last week of March 2009.
Corroborating these trends is the layoff estimates from the Job Openings and Labor Turnover Survey (JOLTS) conducted by the Bureau of Labor Statistics. Layoffs and discharges per month peaked during the recession at 2.5 million in February 2009, but they were down to 1.5 million as of January 2011. In fact, January’s layoff level was the lowest since 2001, including the expansionary years between 2002 and 2007.
The hiring side of the labor market equation is where the recovery is yet to have an impact. Again referring to the JOLTS evidence, monthly hires were as high as 5.6 million in mid-2006 and were above the 5 million mark from mid-2004 until the recession began in December 2007. Hiring then fell to a low point of less than 3.6 million by October 2009 before recovering somewhat to remain between 3.9 million and 4 million throughout 2010.
Based on Business Employment Dynamics (BED) data, the story is similar here in Minnesota. On the basis of gross job gains and losses, BED points to the first quarter of 2009 as the worst point of the recession, when contracting businesses shed 166,000 jobs while expanding firms added only 113,300. By the second quarter of last year, there were 113,400 gross job losses and 137,700 gross gains. So, while both improved, the number of jobs being shed per quarter declined by 52,600 per month, while the gains were expanding by less than half that.
There are indicators that firms are beginning to recognize the need to begin hiring. Often businesses will turn to temp help agencies first to fill their staffing needs rather than undertaking the often costly process of hiring. After declining on an annual basis by as much as 25 percent from mid-2007 through the end of 2009, the employment services industry (three-fourths of which is temp help jobs) began to show annual gains in early 2010 and has now been up over the same month a year ago by 20 percent or more for nearly a year.
Job postings also reveal the need for more workers. The Conference Board produces a monthly series on the number of online job postings by state called the Help Wanted OnLine (HWOL) series. From recessionary trough to present, Minnesota has experienced a 60 percent increase in the number of ads for jobs posted online. Likewise, our own Job Vacancy Survey revealed a 30.6 percent increase in openings between the fourth quarters of 2009 and 2010. At the national level over that same time span, JOLTS estimates of job openings improved by 34 percent.
So it seems from this writer’s perspective that the stage is set for some long-awaited improvements in our employment situation. Businesses have met growing demand without hiring additional workers, but there are strong indications that their ability to keep that up is reaching its limits. Labor productivity is exhibiting its typical cyclical pattern of dropping off to more sustainable levels after surging earlier in the recovery, but consumers are just now showing a renewed willingness and ability to spend on goods and services and just at a time when inventories are greatly reduced.
Risks most certainly remain, if not abound. The winding down of federal stimulus spending and the recent run-up in energy prices will have detrimental effects on overall aggregate demand, and this could be compounded by the passage of overly austere budgets at the state and federal levels. Housing market conditions continue to be worrisome, and the negative wealth effects of further housing depreciations and foreclosures will be another drag on the economy for some time. And it wouldn’t be a shock if nuclear meltdowns, political unrest, and any number of unanticipated future calamities start to take their toll on consumer and business confidence. That would also have negative consequences if it translates into an unwillingness to spend, hire, invest, and expand.
We’ll be watching to see if output growth improves and if productivity gains have run their cyclical course. If so, employment will have to grow by about 100,000 a month nationally for every one point gap between real GDP growth and productivity growth. Four percent GDP and 1 percent productivity growth would translate into 300,000 new jobs a month nationally and 6,000 new jobs a month in Minnesota. That would be just the ticket. I’ll settle, though, for 3.5 percent growth in real GDP, 1.5 percent productivity growth, and 4,000 new jobs a month in Minnesota.