How are we growing? Let me count the ways. The U.S. economy is expanding by
just about every measure. In other words – all major sectors are now
contributing to economic growth, as opposed to last year and the first half of
2003, when the consumer carried just about all of the load. With some misgivings
(for reasons that will be made clear below), this has prompted the National
Bureau of Economic Research (NBER), the umpire of the business cycle, to finally
declare an end to the recession it says began in March 2001.
Fixed as November 2001, this end date makes it possible to compare the
current recovery with those of the past in order to answer the question posed in
the title, as well as to suggest what pitfalls might lay ahead. To begin, since
this recovery officially got underway six quarters ago, overall economic growth,
as measured by the gross domestic product, has been far weaker than normal.
Indeed, the cumulative increase in the GDP so far is only about half as much as
the average of the previous seven recoveries (Chart
1).
Don’t blame the consumer. Thanks to buying power (after-tax personal incomes
adjusted for inflation) that continued to rise right through the last recession
and is currently growing faster than average, overall consumer spending also
rose during the downturn and is now only slightly below its average
post-recession growth path. The gain in buying power traced to two tax cuts and
a sharp slowdown in the rate of inflation, as opposed to any increase in jobs.
And while inflation has picked up a bit, as it usually does at this point in the
business cycle, a third tax cut reached workers over the summer, this one larger
than the previous reductions, suggesting further growth in buying power in the
months ahead.
Because the Federal Reserve dropped interest rates more than a dozen times in
the past 2-1/2 years, bringing them to lows not seen since the late 1950s, such
big-ticket items as automobiles and housing, which depend on the availability of
low-cost credit, have also held up nicely. Indeed, the housing market is so
strong that prices have soared far beyond the rise in household incomes, leading
some to fear a “bubble” may be in the making. Since consumer spending accounts
for more than two-thirds of the GDP, it is possible to say that while the 2001
recession may have been caused by a “perfect storm” of events that had little to
do with domestic economic policy (Economic Report – May/June 2002), it surely
was timely easing on the part of both monetary and fiscal policy that kept this
recession relatively mild.
Having said this, there are a number of troubling aspects that must be
addressed. The business sector, for one, is doing far worse than usual. For
example, industrial production is extremely weak. Instead of running some 11
percent above its end-of-recession levels, the output of the nation’s factories,
mines and utilities is up a puny 1 percent (Chart 2). There are two main reasons
for this underperformance. The first is what appears in hindsight to have been
an overbuilding of industrial capacity during the halcyon days of the 1990s. As
excess capacity developed, many plants shut down, since the demand for their
products was not as great as their supplies. The other is that, until relatively
recently, the U.S. dollar had become extremely overvalued in world financial
markets. This means that goods coming in from abroad were much cheaper than
their counterparts made in this country. As a result, even more productive
capacity was idled.
This excess capacity shows up in business spending on capital goods. Because
outlays for business equipment surged in the 1990s, either due to rapid advances
in technology and/or the bubble in the stock market, such expenditures today are
growing more slowly than they usually do in the early stages of an economic
recovery. Six quarters after the end of the last recession, inflation-adjusted
spending on producers’ durable equipment is up only about one-third as much as
it usually is.
When it comes to structures, the situation is even worse. Not only has real
spending on business structures declined by 15 percent from its end-of-recession
level, when it’s usually about four percent greater, but it’s actually no higher
today than it was in 1979! Excess capacity is obviously a factor, as today’s
workstations require less space than office computers did in the past – and, as
will be discussed more fully below, there are fewer workers to fill these
offices and factories than there used to be.
In spite of the relative strength in consumer spending, business sales so far
in this recovery have been weaker than average (Chart 3). Lack of pricing power
aside, the reasons are similar to those noted above: excess capacity and inroads
by imports. Inflation-adjusted manufacturing and trade sales flattened in 1999,
a time when the overall economy was still expanding, causing inventories to pile
up.
Such sales are little more than two percent above their recession lows,
whereas they usually spring back more than five times as fast. But in what might
be considered a favorable sign for sales and output, inventories are expanding
once again, after a prolonged period of decline. Still, even this sector is
imparting less push than it usually does.
Where this recovery really comes up short is in job creation. To put it
bluntly, there is none – at least when netting out whatever new jobs have been
created against the multitude of jobs that have been lost since this recovery
began. Chart 4 shows this pretty clearly. In the 20 months since the 2001
recession ended, payrolls have shrunk by 1 percent. This stands in stark
contrast with past experience, where, at this point in an upturn payrolls would
be some 4 percent fatter. Even in the weak recovery following the 1990-91
recession, employment was rising at this juncture. No wonder the current upturn
has been labeled a “jobless recovery” (Economic Report – January/February 2003).
Today’s labor market weakness should not be taken lightly. For one thing, it
has already begun to erode consumer confidence. According to the Conference
Board, its measure of consumer attitudes fell sharply in July, mainly because
people have become increasingly worried about their jobs (or the lack of them).
Obviously, if this continues, it will cause people to cut their spending, which
could seriously damage the fledgling economic recovery. It has political
implications as well. According to The New York Times, President Bush finds
himself “in danger of becoming the first president since Herbert Hoover to
oversee a decline in the country’s employment.” If these job losses are not
completely reversed between now and Election Day 2004, then this could well
become an issue in next year’s presidential campaign.
It is not hard to come up with reasons for today’s weak labor market. The
bigger problem is how to ameliorate it.
Labor has many strikes against it, when it comes to job creation. For one
thing the investment boom of the 1990s, combined with rapid advances in
technology, especially the growth of the Internet and the ubiquity of computers,
has led to a surge in efficiency. Productivity, or output per labor hour worked,
is growing much faster than it usually does in an economic recovery – partly
because of last year’s rise, which contained the biggest 12-month jump in
productivity in about 40 years!
Combine faster-than-average productivity growth with slower-than-average
economic growth, and you have a situation where most firms can accommodate the
same or increased demand for their products or services with the same or fewer
workers (Economic Report – September/October 2002). That’s why employment is
falling at a time when it should be rising, and why unemployment is rising at a
time when it should be falling.
Blue-collar workers, those usually engaged in manufacturing, have long felt
the brunt of improvements in productivity, but the technological advances of the
past decade or so are now affecting the white-collar cadre as well. Such
white-collar jobs as call centers long ago migrated to low-cost areas – first
within the United States, then to other countries where labor costs are well
below those stateside. However, the growth of the Internet has enabled companies
to send abroad such skilled jobs as writing computer code and
software-application maintenance, medical diagnostics, research analysis and
treasury management.
In fact, according to BusinessWeek, one out of three private-sector jobs is
now at risk of being outsourced – and that does not count such back-office
functions as accounts payable, marketing and sales. The magazine adds that “as
soon as work can be made routine – whether it’s reading an X-ray or creating
blueprints – the job can potentially be outsourced.”
You can see this trend in the jobless rate for managers and professionals.
They now account for almost one-fifth of the unemployed. At the end of the
1990-91 recession, they were 11 percent; 20 years ago little more than 6
percent. Not surprisingly, most of these people are highly educated; college
graduates constitute more than 13 percent of the unemployed these days. Once a
job is lost, it is becoming increasingly difficult to find a new one. Some 22
percent of the unemployed have been out of work for a half year or longer – one
of the largest percentages in the postwar period. It was because of this
weakness in the labor markets that the NBER took so long to declare the official
end to the last recession.
Workable solutions to this problem are difficult to come up with. While a
faster rate of economic growth might eventually force some firms to add to their
staffs, the nagging problem of outsourcing will still remain. Legislation
preventing companies from shifting jobs overseas goes against our capitalist
system; it would also invite retaliation from other countries. Tax incentives to
create jobs and penalties for exporting jobs might pass, but again, would be
subject to widespread criticism.
In the final analysis, the solution is more education. This is the way the
United States has maintained its lead in the past. To create new jobs while the
old ones migrate overseas, our workers must be better trained, and provide more
value added than their counterparts elsewhere. To be sure there is room for
them, the entrepreneurial spirit that has fostered new companies in new
industries must not be stifled.
Think of all the jobs today that did not exist 20 years ago, and you’ll see
what I mean.
Hofstra University
Zarb School of Business
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The Zarb E.M.B.A. program features a global focus, state-of-the art classroom
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Dr. Irwin
Kellner is the Weller Professor of Economics at Hofstra
University and Chief Economist at North Fork Bank and CBS MarketWatch.
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