The November unemployment report was bad news, after a string of good jobs reports, so it is important to understand what spurs job creation. The unemployment rate based on a small sampling of both the salaried and self employed rose to 9.8 percent. The broader payroll survey of businesses showed a net increase of 39,000 nonfarm payroll jobs—50,000 in private industry less 11,000 government jobs lost.
So based on the jobs’ numbers, the recovery is shaping up to be not V or U-shaped, but W-shaped. That is, the recovery that began in earnest when the various government stimulus programs kicked in—TARP (for banks), ARRA (for infrastructure and job creation), HAMP (for mortgage modification), and the Fed’s purchase of Treasury and Mortgage backed securities—reversed when the effects of the stimulus spending weakened.
Most of the TARP monies have been repaid, as well as the ARRA monies that have created or saved between 1.5 to 3.5 million jobs, according to the Congressional Budget Office, and the small number of mortgage modifications are barely making a dent in home foreclosures.
What should not be hard to understand is that private businesses begin to hire only when they see sustainable demand for their goods and services increase. That demand comes both from consumers and businesses, investors and producers, in both the private and government sectors. All use those goods and services, so when the private sector shrank in 2007 government stepped in, but it could not make up for all the private sector demand that was lost (something like a $6 trillion shortfall).
The private sector meanwhile has been sitting on their money. Corporations with a year of record profits have more than $1.8 trillion in cash salted away, banks have $1 trillion in excess reserves they are not using, and even consumers have been paying down debts faster and saving more than they have spent.
So the recovery which began January 2008 abruptly stalled when that aid declined. In part this was because state and local governments then began to shed jobs as their revenues shrank. It is only in 2010 that private business is beginning to hire again to the tune of 86,000 per month since January 2010. Both the manufacturing and service sectors have been expanding and are now hiring again.
The reason hiring has been slow, is that companies have been squeezing out as much output as possible from the current workforce instead of adding to payrolls—investing in more technology to replace workers—which is why productivity for the third quarter got a boost. Nonfarm business productivity for the third quarter was revised up to a 2.3 percent gain from the initial estimate of 1.9 percent, as we said last week.
The Institute for Supply Management’s November manufacturing survey, the best indicator of domestic manufacturing activity, shows businesses are continuing to add employees. The 57.5 index level for employment is very strong.
The ISM's non-manufacturing index rose seven tenths to 55.0, the highest reading in six months and reflecting strong monthly gains for new orders and employment. The latter gain, taking the component to 52.7 for its strongest reading of the recovery, is notable given the softness in the employment report. This report's employment index, until this month, had been very flat indicating that non-manufacturers had been reluctant to hire. Unadjusted gains for retail and corporate management led the month's employment gain.
So there is a broad misconception that only jobs created by the private sector—though desirable—are the only engine of sustainable economic growth. Government always has been, and will continue to be a partner in this growth. Especially in a modern and overcrowded world where the water we drink, the air we breathe, the resources we consume, as well as our neighborhoods have to be preserved and protected.
And both governments and the private sector have to borrow to be able to function effectively. So those who decry government spending are really ignoring the obvious—that we will always have business cycles with recurring recessions that don’t ‘cure’ themselves.
We have to remember, though, all this depends on a continuing demand for goods and services, which in turn needs readily available credit. Banks are only now beginning to lend again to small businesses, as various small business sentiment surveys indicate. Such optimism must continue to grow for the hiring to continue.
Harlan Green © 2010
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