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Manufacturing, Retail Keys to Jobs Report

Since December 2007, the economy has been shedding jobs, and a sharp uptick in employment would indicate the recession is ending.

The key things to look for in Friday's employment report are whether manufacturing, retail sales and construction are improving.

Since December 2007, the economy has been shedding jobs, and a sharp uptick in employment would indicate the recession is ending.

In December, the economy lost 85,000 jobs after gaining 4,000 in November and losing 127,000 in October. The unemployment rate stood steady at 10%, largely because 843,000 unemployed adults became discouraged and left the labor force -- quit looking for work.

For January, analysts are ambivalent, forecasting no change in the jobs count and a slight uptick in unemployment to 10.1%. My forecast is for loss in the range of 25,000 jobs and for unemployment to rise to 10.1%.

Although some indicators of economic activity, such as GDP, industrial production and consumer confidence, have shown gains, others such as retail sales and durable goods orders have been soft.

The

ADP private survey

of employers for January, released Wednesday, indicated job losses consistent with my forecast, but ADP forecasts have proven only a rough indicator of what the Labor Department reports for employment two days later.

Recent soundings of manufacturers by the

Institute for Supply Management

indicate manufacturing is picking up steam, and more firms are adding employees than shedding them. Inventory data indicated wholesalers are once restocking shelves. Hence we should expect a reduction in manufacturing job losses.

In December and November, 27,000 and 35,000 jobs manufacturing jobs were lost. In January, the number should be much better if things are really looking up at the nation's factories.

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Preliminary soundings for January retail sales indicate slight gains from December on a seasonably adjusted basis. If stronger consumer confidence is translating into mall activity, retail employment, which was down 10,000 in December, should level off in January.

Finally, the $789 billion stimulus package has not been reflected in construction employment. Construction, like manufacturing, has consistently shed jobs during the recession, losing 53,000 in December. Residential construction remains weak, but that is only about one-fourth of the construction sector. If stimulus spending is making things better, job losses in the construction sector should moderate.

Fourth-quarter GDP growth was 5.7%, but 60% of that was a slower pace in depletion in business inventories. Businesses continued to sell more goods off their shelves than they produced, but depletion of inventories fell from $157 billion in the third quarter to $40 billion in the fourth.

In the arcane world of GDP accounting, that increased GDP by 3.4 percentage points.

Domestic consumption and investment contributed a paltry 1.8 percentage points, and that pace is not likely to improve enough soon to power a strong recovery.

Improvements in the trade deficit, more exports and fewer imports, will be needed to fire up the economy and accomplish growth above 4% to significantly reduce unemployment.

The president's export initiatives will help a bit, but China, the largest potential growth market, exports about $330 billion annually to the U.S. while purchasing only about $90 billion from American businesses.

China maintains

an undervalued currency that makes its goods artificially cheap -- inexpensive well beyond its labor cost advantage -- and imposes high tariffs and other barriers to U.S. exports.

The imbalance in trade, and particularly the unlevel playing field with Chinese factories, is the most important factor keeping unemployment at 10%.

Without a reduction in the trade deficit -- most importantly, progress redressing the imbalance with China -- it will be tough to get the economy growing rapidly enough to bring down unemployment.

Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.