Jobs growth and GDP growth

Richard Berner at Morgan Stanley has two articles recently on the GDP growth number of 7.2% annual rate for the Summer 2003 quarter. He's been fairly bullish about the recovery. These articles take a bit more subdued tone. The thing to watch this Friday, November 7, will be the Employment Situation report from the Bureau of Labor Statistics. This will tell us if the September uptick in payroll employment continued into October or not. If it did, we may be on the way to a slow, slogging, but sustainable recovery. If not, and the "job-loss recovery" continues, we may be into the very bad side of things that Brad DeLong forecasts. "[T]he longer the disjunction between fast output growth and stagnant employment continues, the less likely this smack-in-the-middle forecast becomes. Things are very likely to be either significantly better or significantly worse than the current consensus forecast--but we have no idea which."

Friday, October 31, 2003: Unsustainable?

That’s surely an anemic performance, but considering the miserable job market (worker hours declined by 1.3%) and the 12.9% jump in energy prices over the past year, such pretax “core” income held its own. That’s the positive side to productivity growth; for the American worker, it has meant that real wages are rising by 1½% or so. With only a modest upturn in worker hours, therefore, such core income could quickly accelerate to a 3% to 3½% pace. Thus, job growth remains the critical missing link that will assure sustainability; with it, consumers will have both the wherewithal and the confidence both to sustain spending and begin the needed process of rebuilding saving. For businesses to hire again in earnest, they will have to overcome their risk aversion of the past three years. I think that is beginning to happen.

Here is his rationale for believing sustainable growth is coming:

Monday, November 3, 2003: Animal Spirits?

Animal spirits, according to Lord Keynes, or “spontaneous optimism” may drive business or consumer decisions in a way that defies cold logic or mathematical expectations. In identifying the factors accounting for the rhythm of the business cycle, Keynes defined animal spirits as “a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities." (See The General Theory, pp. 161-162.) What was true about animal spirits in 1935 when Keynes published is still true today: Confidence depends on many factors beyond our ability to predict.

Courtesy mainly of more timely data, prognosticators standing on Keynes’s shoulders have made some progress in their ability to predict the cycle, even if animal spirits remain hard to fathom. And unlike in Keynes’ day, surveys of business confidence are now regularly available. In my view, these surveys are important to monitor, even if animal spirits are hard to predict. That’s not so much because business confidence leads business activity; more likely, it is a coincident indicator. Rather, it corroborates the news in broad macro conditions, it tends to confirm that recovery is sustainable, and it anticipates improvement in hiring and capital spending. Both of these typically lag the start of the recovery, and both help assure its sustainability.

(snip)

The small businesses polled seem strongly to confirm that recovery is under way, and owners appear quite upbeat. The NFIB’s small business optimism index recently reached a two-decade high of 103.3 in August-September. Another gauge in this family of indexes also is constructive: The outlook for business conditions rose to a net 43% of all firms, a twenty-one year high. According to NFIB Chief Economist Bill Dunkelberg, “This index has reliably anticipated every period of growth since the 1974-75 recession period.”

(snip)

Small business hiring plans could be an especially important indicator assuring sustainability because it is widely thought that small businesses are responsible for the bulk of job creation in the United States, and that large companies aren’t increasing net employment. For example, the U.S. Small Business Administration asserts on its website that small businesses (establishments with fewer than 500 employees) generate 60 to 80 percent of net new jobs annually. For its part, the NFIB claims that small businesses create two-thirds of the new jobs in the United States. The real story is more complicated, because small businesses that grow become big businesses or are acquired by larger firms. But there is no mistaking the fact that small businesses employ roughly half the workforce, and that both they and larger firms feel that rising health care and other insurance costs are a key business problem. I think that this hiring obstacle will keep the coming employment recovery subdued (see “When Will the Jobless Recovery End?,” Investment Perspectives, September 2, 2003).[emphasis added]

(snip)

That animal spirits seem to be rising faster at small businesses than at large firms would partly help resolve the disconnect between cautious CEOs and upbeat economic reports. Differences aside, both polls do point to recovery. Of course, these polls are no guarantee that the current recovery will mature onto sustainable expansion; after all, surveys are one thing, while actions are another. The proof of these surveys will be in whether the optimism from businesses small and large is borne out in hiring and capital spending decisions. [emphasis added]