In spite of Mideast unrest (when was it restful?), and the massive snow job hitting most of the U.S. (the biggest storm of the century?) the output of goods and services continues to improve. Businesses through the fourth quarter made the most of the workers already on payrolls, while resisting any temptation to add new employees to their payrolls. At some point, however, businesses will have to boost hours and hiring to grow, says Econoday, of the latest Labor Dept. release on labor productivity. Where are those jobs coming from?
Unit labor costs—which make up two-thirds of product costs—are at record lows, which is why corporate profits are soaring while wages and salaries are basically stagnant. Businesses are still keeping a rein on labor costs, in other words. Workers are again producing as much as prior to the recession, but with approximately 7.2 million fewer jobs, according to Barron’s. This is while real compensation per hour adjusted for inflation actually fell 0.6 percent.
Nonfarm business productivity itself rose an annualized 2.6 percent in the fourth quarter after gaining 2.4 percent in the prior quarter. This gain in productivity reflects increases of 4.5 percent annualized in output in the nonfarm business sector and 1.8 percent in hours worked. Annual average productivity is up a whopping 3.6 percent, the highest in this decade.
Meanwhile initial jobless claims, the best predictor of job growth, continued to edge downward offering some hope to the unemployed, but remained above the crucial 400,000 weekly number that signals enough jobs are being created to absorb new entrants to the labor force. A weather-related pile up of claims in the South unwound in the January 29 week which saw initial claims fall a very steep 42,000 to 415,000 (prior week revised 3,000 higher to 457,000).
Alabama, Georgia, North Carolina and South Carolina posted some the biggest declines after the four states posted big increases in the prior week due to snow effects. Distortions always put the emphasis on the four-week average which, unfortunately, is signaling trouble for tomorrow's monthly employment report. The four-week average is up 1,000 to 430,500 to show a roughly 15,000 rise from a month ago.
So the employment component of the ISM's non-manufacturing (service sector) survey, a reading that offers a broad measure of labor demand, is more closely watched than ever since the service sector makes up two-thirds of our economic activity. This index jumped nearly two points in January to 54.5, by far the best reading of the recovery and pointing to a positive surprise for tomorrow's big employment report.
January's ISM non-manufacturing results are very similar to its report on the manufacturing side released on Tuesday. Gains are wide and convincing led by a nearly 2-1/2 point jump in the headline composite index to 59.4, also a recovery best. Details show especially strong monthly acceleration for new orders, a reading that points to greater acceleration for the broad economy in the months ahead.
The pace of monthly job losses have slowed dramatically soon after President Obama and Congress enacted the Recovery Act in February 2009, as we have said, but is lagging past recoveries when job growth was as high as 6 percent, vs. the current paltry 2 percent growth rate. The trend in job growth this year has been difficult to discern because of the rapid ramp-up and subsequent decline in government hiring for the 2010 Census (which is now largely over), but private employers added a total of 1.3 million jobs to their payrolls in 2010, an average of 112,000 jobs a month.
The latest unemployment report showed the jobless rate dropping to 9 percent, with 600,000 more jobs added in the Household survey. The payroll survey said most of those jobs were in manufacturing, in part due to the horrible winter. Producers are only hurting themselves by hoarding their profits as they are now doing (to the tune of $2 trillion in cash on their books) instead of hiring more workers, as greater employment also means more demand for their products.
Harlan Green © 2010