Finally, it seems, the long-awaited second-half recovery is upon us. Last week's barrage of economic data included some convincing signs the economy is on the mend and poised for stronger growth. However, Friday's surprising 44,000 decline in nonfarm payrolls suggests the recovery remains jobless, and may stay that way even if economic growth accelerates.
That employment is a "lagging indicator" has become a mantra for optimists, who foresee a virtuous cycle of stronger economic growth generating rising employment, which perpetuates consumer spending, fueling higher corporate earnings and, ultimately, still stronger GDP growth via increased business spending. (Lather, rinse, repeat.)
Last week's second-quarter GDP report and national manufacturing index included hints of this, bulls declared. Economists further cite recent strength in commodity prices as a sign of hope for the beleaguered manufacturing sector, where about 90% of the 2.7 million jobs lost since February 2001 have occurred.
But this recovery is proving to be different when it comes to employment trends. Some forecasters believe the more than 2.4 million manufacturing jobs lost may be gone for good, further suggesting rising commodity prices augur strength in global manufacturing, not necessarily in the U.S.
"The slowness of recovery doesn't adequately explain the tremendous weakness in manufacturing" employment, said Anirvan Banerji, director of research at the Economic Cycle Research Institute and a
contributor. "Manufacturing employment has been plunging
and is not slowing down. When you see that trajectory and compare with earlier jobless recoveries, you see how different it is this time."
On Friday, the government said the manufacturing sector shed another 48,000 jobs in July, its 36th consecutive monthly decline. Meanwhile, even as the unemployment rate unexpectedly dipped to 6.2%, the average workweek for all employees fell to its lowest level since 1964. Those figures contributed to Friday's weak stock market. More importantly, they reflected Banerji's theory about this recovery being unique, and in a way that should be disturbing to those betting on a robust jobs recovery.
No Bounce This Time?
As the accompanying chart demonstrates, employment declines had at least started to level off at similar points in recoveries that followed mild recessions in 1969-70 and 1990-91 (The 1980-81 recovery was omitted because it was so short-lived.) Given the ongoing pace of job losses in the current environment, the conventional wisdom that job growth will arrive once GDP growth picks up is "completely inadequate," he declared. "We've never had a recovery in which nonfarm payrolls declined this long. Something else is going on."
With apologies to Marvin Gaye, what's going on is a "major structural shift in manufacturing employment," Banerji said, extrapolating on points made
Down on the Upside
Faced with limited pricing power and rising input costs -- including raw materials, employee benefits and pension obligations -- the only way for U.S. manufacturers to compete is by raising productivity or outsourcing production, he observed. Higher productivity means less need for workers; outsourcing certainly does. Banerji noted the trend of jobs migrating to China has accelerated, citing "huge shifts in the pace of movement," not just from the U.S. but from Taiwan, Korea, the Caribbean and Mexico as well. "There appears to be a permanent shift in manufacturing employment
and it's not clear when it ends."
If there is a secular shift afoot, the cycle watcher isn't sure how either lower interest rates or tax incentives for spending on business equipment will boost employment, creating a big crimp in the virtuous-cycle scenario mentioned above.
Currently, this possibility isn't being considered by most, but "the idea jobs aren't coming back will gain mainstream acceptance," predicts Brad Ruderman, managing partner at Los Angeles-based Ruderman Capital Partners. "There's going to be a seminal change in the thought process. People are going to figure out it's more secular vs. cyclical."
Ruderman's hedge fund is long
, as beneficiaries of the trend toward outsourcing of information technology jobs -- something far smaller in magnitude than trends in manufacturing but which has received increased attention, perhaps because the jobs lost are higher-paying. (
Paul Kedrosky recently
examined this burgeoning trend.)
To date, however, those optimistic about stocks continue to believe strong jobs growth will, by definition, follow stronger economic performance.
Panning for Hope
One oft-cited reason for forthcoming strength in the economy -- and manufacturing in particular -- is strength in commodity prices. The Journal of Commerce-ECRI Industrial Price Index is up 14.4% on an annual basis, amid near across-the-board strength in various commodities.
There is evidence linking strength in commodities to better economic growth and corporate earnings. Indeed, the industrial price index contributed to the growth rate of the ECRI's weekly leading index hitting a 20-year high last week. That, in turn, prompted Banerji to declare: The "window of vulnerability" open earlier this year has now closed, "making it very unlikely that the economy will enter a recession this year, even in the event of an external shock."
One reason some observers are upbeat about economic growth but downbeat about jobs is that higher "commodity prices are more a reflection of global demand
for raw materials vs. U.S. demand," said Gerald Cohen, senior economist at Merrill Lynch. "We are seeing a pickup in the U.S. economy, but higher commodity prices is more a positive sign about global growth vs. U.S. growth."
Of course, most economists believe stronger growth anywhere in the global economy is a good thing and will ultimately boost the U.S. economy. Perhaps that's why Alan Greenspan made the politically insensitive observation last month that it doesn't really matter where products are made, implying the U.S. doesn't need a manufacturing sector. That may be true in a macro sense, and most economists, including Greenspan, have faith the U.S. economy will innovate and create new jobs, and that versatile American workers will adapt to new opportunities.
In the meantime, however, there's a lot of pain at the micro (i.e., real people) level, which may not be ending anytime soon. Given those folks are potential investors and voters, such harsh realities could have widespread implications.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.