Job Growth Through the Looking Glass

Editor's note: This is a bonus story from Anirvan Banerji, whose commentary usually appears only on RealMoney. It originally was published on Sept. 2 and since updated to reflect Friday's employment data. We're offering it today to TheStreet.com readers. To read Banerji's commentary every day, please click here for information about a free trial to RealMoney.

---

For students of the business cycle, the recent slowdown in job growth was no big surprise. After all, GDP and employment are both roughly coincident indicators of the economy, and their growth rates move more or less in sync.

If you juxtapose the two variables over the last few cycles, this link jumps out at you. What's different this time is that a significant gap has emerged between GDP and job growth, which is why, following the latest downturn in GDP growth, job growth plunged. (Following weaker-than-expected readings in June and July, nonfarm payroll growth of 144,000 for August was reported Friday, roughly in line with expectations while June and July tallies were revised upward.)

In the chart below, payroll job growth is shown in quarterly terms, as an annualized growth rate, to match the way GDP growth is popularly measured. Historically, the two have moved together; yes, I'm saying employment as a "lagging indicator" is the exception, not the rule -- despite conventional wisdom to the contrary.

One exception was the divergence between the two during the "jobless recovery" of the early 1990s before job growth finally caught up with GDP growth. Then, with the step-up in productivity growth in the mid-1990s, GDP growth stayed above job growth for the rest of the decade.

Following the 2001 recession, a yawning gap opened between GDP and job growth, and thus far has refused to narrow. But note how faithfully recent fluctuations in job growth have followed those in GDP growth.

GDP and Job Growth (%)

Source: Economic Cycle Research Institute

The problem is that the U.S. economy is still in the throes of the rapid structural change I highlighted here in the summer of 2003. Employers contending with a lack of pricing power and rising labor and health care costs ramped up productivity growth and outsourced jobs overseas to cut costs. The resultant erosion of jobs hasn't stopped, and continues to inexorably undercut overall job growth -- even more visibly during a slowdown.

Paradoxically, the furor about outsourcing generated by American politicians and media has actually helped to quicken the trend. The publicity alerted many firms to the potential cost savings, and spurred them to take advantage of the opportunities. The biggest beneficiary of this trend has been China. But as many Indian firms will tell you privately, they've also experienced a surge in business.