WHY THIS RECOVERY FEELS LIKE A RECESSION

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
June 3, 2003

IN THIS ISSUE:

1.  Why Unemployment Is Rising In A Recovery.

2.  Worker Productivity Is Outpacing Demand.

3.  The Technology Boom Is The Reason Why.

4.  GDP Needs To Rise 3%+ To Create New Jobs.

Introduction

This week I will summarize some excellent economic analysis published recently by Jon E. Hilsenrath of the Wall Street Journal.  Like most of you, I trust, I have not fully understood why this recovery still feels like a recession, but now I do.  In this issue, I will try to explain.

Recovery Or Recession?

To hear the gloom-and-doom crowd talk, you would think we never came out of the 2001 recession, and that we’re headed for a depression.  Of course, that’s what they’ve repeatedly promised for the last 25 years that I know of.  Admittedly, this recovery is not robust, but we are not in a recession.

So what is a recession, anyway?  The widely accepted definition of a recession is two or more consecutive quarters of negative growth in GDP.  Here are the GDP numbers for the last two years and the latest government estimate for 1Q 2003:

2001

2002

2003

1Q

-0.6%

1Q

+5.0%

1Q

+1.9%

2Q

-1.6%

2Q

+1.3%

 

 

3Q

-0.3%

3Q

+4.0%

 

 

4Q

+2.7%

4Q

+1.4%

 

 

As you can see, the recession occurred in 1Q-3Q of 2001, and we have been positive for the last six quarters.  So, why doesn’t it feel like a recovery?  Why does unemployment keep going up?  Why are people having so much trouble finding jobs?

Why, In A Recovery, Is Unemployment Still Going Up?

In the 4Q of 2001, consumers were spending more and economic output was rising, despite the 911 attacks on the US.  Since then, GDP has been in positive territory, as noted above.  Yet instead of expanding employment, companies are continuing to shed jobs at a furious pace - 525,000 non-farm payroll positions in the past three months alone. Since early 2001, when the recession began, the U.S. economy has lost 2.1 million jobs, even though the economy, as measured by GDP growth, has been positive for six consecutive quarters.

The total number of people unemployed, including discouraged workers who would prefer to work but have stopped looking, is apprx. 9.2 million.   And the number of people who are working part-time because they can't find full-time work is 4.8 million, up 46% since 2001, according to the Bureau of Labor Statistics.  These are BIG numbers!

As Jon Hilsenrath points out, this slow economy has left behind a remarkably broad swath of workers -- from young to old, and from high school dropouts to the highly educated, even as the economy has started growing again.  Why is this happening?

Structural Change In The Labor Market

Across almost all industry sectors the trend is toward higher efficiency .  The labor market is in the midst of a structural change, with numerous industries, from manufacturers to financial firms to airlines to hotels, adjusting to a new economic order after the boom of the late 1990s.    Growing competition from abroad, slow growth at home and a relentless push for productivity are driving this change.  Yet this is not altogether new, actually.  Recessions have historically forced many industries to change how they operate.

But what is surprising many economists is the fact that the current restructuring in the labor market is so harsh, especially considering that the recession in 2001 was a mild one, historically speaking.  Most economists predicted that the unemployment rate would peak and begin to fall last year.  Yet only recently has it climbed to 6%.  (We should keep in mind that 6% unemployment is still relatively low – more on this later.)

Economists are not only surprised at how long this restructuring is taking, but also how broad-based it is.  Very few industries are not feeling the pinch.

Laid Off Workers Don’t Get Called Back

Erica Groshen, a labor economist with the Federal Reserve Bank of New York, recently studied employment trends in 70 industries over the past 30 years. She found that the structural change is vast.  She said:

“Before in a recession you had a lot of companies giving people temporary layoffs, saying, ‘We’ll call you back when we need you.’  That is not what firms do anymore.  During recessions in the 1970s and 1980s, about half of all jobs were in industries that tended to go through cyclical swings.”

When Ms. Groshen refers to “cyclical swings,” she is pointing to industries which periodically or occasionally see their business slow down.  During those periods, workers were laid off, but many of them would be called back as soon as business picked up again.  Groshen found that during the ‘70s and ‘80s , apprx. half of laid off workers were called back, while about half experienced permanent changes, meaning that jobs which were eliminated were never meant to come back.  So, half and half - part temporary layoffs and part permanent ones.

Yet this trend began to change radically since the last recession in 1990 and has intensified since then. Today, it is estimated that at least 75% of jobs are in industries going through a structural change - meaning that companies are reducing employees as a result of increasing productivity - on an employee-by-employee basis.  In other words, because worker productivity has increased so dramatically, workers who choose to leave or are laid off or are fired for poor performance, are not being replaced.   Their work is simply being taken over by existing employees.

The Jobless Recovery

As discussed just above, companies around the US have been in a transition.  Whereas in the past they would temporarily lay off workers, many are now reducing their workforces permanently (or at least for the foreseeable future) and cutting their payrolls. 

Payrolls in the electronics sector, and for producers of industrial equipment, have declined for 28 straight months.  In communications, payrolls have fallen for 24 months.  In the securities and airline industries, they have fallen in 16 of the past 24 months.  These are just a few examples.

In many ways, the latest rise in unemployment is the downside of a technology and productivity boom that developed during the 1990s.  We all know how much technology has advanced over the last 20 years.  Productivity per worker has exploded as well.  Over the last two years, this trend has accelerated, even as the economy has slowed significantly.  This is the key.

The Bottom Line

The bottom line is, worker productivity has been growing faster than the overall economy. That has allowed corporate executives to meet increases in demand while still eliminating jobs.  This is very unusual.

Worker productivity historically increases in the early stages of a recovery, but this time the mismatch between productivity and overall economic growth is unprecedented.  There have been 10 recessions since 1949, including the recession in 2001.  In the recoveries following eight of those 10 recessions, demand grew faster than the increase in worker productivity.  Usually, demand far outpaced worker productivity.  The result:  Unemployment actually declined, and more people went back to work following the eight recessions from 1949 to 1982.

However, following the 1991 recession, which was also relatively mild, demand and worker productivity increased at about the same rate.  But as noted above, worker productivity has exploded since then.  Here are the numbers for the latest recession:

GDP (demand) has expanded at an average annual rate of 2.7% since the 4Q of 2001.  Yet during the same period, the productivity of the nation's work force (defined as output per hour of work) has expanded at a much faster rate of 4.2%.  End result: higher unemployment.

Some Unusual Unemployment Demographics

Hilsenrath quotes more interesting statistics.  In the past, recessions tended to have the greatest impact on less-educated workers and younger workers. But in the 2001 recession and since then, the effects on unemployment have spread out across so many industries that they have created a broader class of job-market casualties.  Age is no longer a significant distinction.  Also, well-educated workers, used to being sheltered in a slump, have been hit hard.  Probably everyone reading this has well-educated relatives or close friends who have lost their jobs as a result of the labor restructuring.

For example, in the last three years, the unemployment rate for college graduates over 25, who enjoyed the lion’s share of the economy’s gains during the 1980s and 1990s, has risen by 1.6%, not much less than the 2.1% increase for high school dropouts.

Many educated workers were concentrated in industries that were hit the hardest by the downturn, such as technology and finance.  The unemployment rate for computer scientists and mathematicians rose from 0.7% in February 1998 to about 6% at the end of 2002, according to research by the Economic Policy Institute.

Longer To Find A Job

For the millions of Americans who are now unemployed, the protracted nature of this labor restructuring means it has been excruciatingly difficult to get work again.  For some, job searches are dragging on long after their unemployment benefits have expired and they have plowed through their savings.  In the last year, nearly 2.8 million people have exhausted their unemployment benefits.  Many others are scrambling in ways that don’t get picked up in unemployment statistics.

Educated workers seem especially prone to bouts of long-term unemployment in this downturn.  Hilsenrath found that of the 1.9 million workers who have been unemployed for six months or more, one in five is a former executive, professional or manager, according to a study by the National Employment Law Project, a nonprofit advocacy group for the unemployed.  Because these workers have specific, often technical skills, it is often harder for them to find a job that matches those skills.

Many people are being forced into taking lower-paying jobs, while others are going back to school to learn new skills and still others are becoming independent consultants and picking up small projects when they can.  One problem with today’s long bouts of unemployment is that the longer an individual stays out of work, the more likely he or she is to take a new job at a much lower salary.  This is all a part of the unusually long labor restructuring.

Manufacturing Moves Overseas

Permanent job losses in the US are also due to the increased competition created by the globalization of the economy.  Not only do many companies cut their workforces in the US, globalization has forced many companies to actually close plants in America and move them to places like Mexico, China or India, where labor is much cheaper.  While this is not a new phenomenon, the trend has accelerated in recent years.

Many people believe this practice is un-American, and that many corporate executives are heartless and greedy.  Yet in many industries, corporations have had no choice but to move their manufacturing operations to countries where labor is cheaper.

So, in addition to increased worker productivity - fewer workers doing more work - the unemployment problem is further exacerbated by the globalization of the economy.  As a result, millions of workers are forced to leave shrinking industries and move into others where jobs are available.

The Solution:  The Economy Has To Grow Faster

The obvious solution to the unemployment problem is for demand to increase so that the economy can grow at a faster pace.  As noted above, the economy has grown at an annual rate of 2.7% since the 4Q of 2001 when the recession ended.  Yet unemployment has risen from 5.8% in December 2001 to 6%.  Different economists have different estimates on how fast the economy would have to grow to stop the rise in unemployment.  Many believe that a 3% rate would stabilize unemployment, and most agree that a growth rate higher than that would actually begin to reduce unemployment.

Hilsenrath quotes Harry Holzer, a labor economist at Georgetown University, who says, “If you want people to have jobs, your demand-side growth has to be much stronger.  The nation would need a 3.5% growth rate in GDP for the unemployment rate not to get worse, but 3.5% is looking optimistic for this year.”

Professor Holzer may be correct in suggesting that a 3.5% growth rate in GDP is optimistic for this year, but we may yet be surprised.  The June issue of the highly respected Bank Credit Analyst, for example, is even more positive than their May issue. (I may summarize BCA’s latest analysis for you next week.)  

Good Long-Term, But Bad Short-Term

Most economists agree productivity growth is good for workers over the long-run, because it tends to lead to higher wages.  But in the short-run, it is creating a problem in higher unemployment.  In the long-run, this weeding-out of less efficient companies will be a good thing, but in the short-term it is a painful adjustment.  This is how we have ended up with a “jobless recovery.”

Conclusions

This recovery feels like we’re still in a recession, even though GDP has been positive for the last six quarters.  The reason is that worker productivity is increasing faster than the growth rate in the economy.  As a result, corporations continue to eliminate jobs.

This has happened due to the enormous technology boom which has occurred over the last decade and continues today.  Workers are so much more productive today that companies can cut back and/or not replace workers who leave, thus causing unemployment to go up.

As noted earlier, the 6% unemployment rate is relatively low, historically speaking.  Actually, at 6%, the unemployment rate is only a little above its average of 5.6% during the past 55 years.  In 1982, in contrast, it swelled to 10.8%.  In 1992, it reached 7.8%.  Nevertheless, the loss of 2.1 million jobs since the recession began in early 2001 is very significant.  At least we now know why.

The good news is that the economy is recovering, albeit slowly at this point.   Consumer confidence is rising and hopefully, consumer spending will continue to increase, although it did not in April.  As noted above, if the economy can get back to a 3% or better growth rate, unemployment will peak and begin to fall slowly.   Obviously, we are not there yet, but we’ll get there.

Predictably, the Democrats are blaming Bush for the rise in unemployment.  The Republicans, of course, blame Clinton. But as we now know, the boom in technology is primarily responsible for the recent mild rise in unemployment.  It probably would have happened no matter who was in the White House.  Keep that in mind as the campaign unfolds.

Best Wishes,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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