Here are three distinct points of view to ponder when it comes to the outlook for the US recovery.
First, the prospect of a jobless recovery — that is, one which doesn’t produce growth in employment. From the Wall Street Journal:
Companies across the economy are holding off on hiring even as the profit outlook improves, amid economic uncertainty and their own success at raising productivity in rough waters.
Hiring always lags behind in economic recoveries, but the outlook this time is worse, many economists say. Most forecasters now expect a prolonged period of high unemployment, even though the government is expected to report next week that the economy grew in the third quarter, after four quarters of contraction. That is sure to frustrate the jobless and could be a problem for the Obama administration.
A jobless recovery? Scratch that.
What about a recovery with job losses? From the San Francisco Chronicle:
Third-quarter estimates this week are expected to show that the economy grew for the first time since the quarter ending in June 2008. Despite the estimated 3 percent expansion and a stock market that has been on a tear since March, hundreds of thousands of people are still being laid off each month.
Eight million jobs have been lost nationwide since the recession began two years ago, and by some measures workers face the worst job market since the Depression. The average laid-off worker has been without a job for 61/2 months, a post-World War II record. Many of those workers will never recover financially.
California’s hole, deepened by a state budget mess and volatile tax system, is far worse: Unemployment is at 12.2 percent, third highest in the nation; and adding discouraged and part-time workers puts it over 20 percent.
“It’s not even a jobless recovery; it’s a recovery with more job losses,” said UCLA economist Lee Ohanian. “The idea of having essentially no net job creation after a remarkably severe recession is a real pathology for the U.S. economy.”
If all that is too bearish for you, though, here’s Bank of America Merrill Lynch’s global economy team with something you don’t hear about very often — the job-full (US) recovery:
If there is going to be a jobless recovery, it is more likely in the slowly recovering, over-employed countries of Europe than the faster recovering under-employed US. The US is one of the few places on earth where the decline in employment was significantly higher than the decline in production and that supports our view that we will see job growth within one-year of the recession’s end, which we believe was in June 2009.
And here’s a bit more detail:
A common refrain is that the US will experience a “jobless recovery” in the next year or so. We disagree: US companies appear to have over-reacted to the recession, cutting more jobs than necessary. We expect payroll growth to turn positive in Q1 2010 and accelerate to 200,000 by the end of the year. On the other hand, a jobless recovery is likely in other countries that experienced relatively small job loses during the recession.
The last two business cycle recoveries in the US were jobless — employers continued to cut staff for at least a year after the recession’s end (Chart 1). Moreover, a recent Wall Street Journal article (“Employers Hold Off on Hiring,” 20 October 2009) outlined four common arguments for why history might repeat itself. Certainly there is some truth to these arguments, but let’s put them in perspective.
1. Uncertainty about the regulatory outlook — financial regulation, cap and trade legislation (for limiting air pollution) and health care reform—will constrain hiring. Although this is very hard to quantify, certainly uncertainty about the regulatory environment will have some impact on business expansion plans. However, it seems less likely that it will prevent businesses from trying to restore part of their normal functioning.
2. Businesses will hold back on hiring due to doubts about the durability of the recovery. Clearly this is an important factor in the continued sharp drop in jobs. However, as the recovery takes hold, and with the usual lags, companies should have the confidence to take back some of the laid-off workers.
3. Firms have learned to make do with less and therefore will not rehire people they have laid off. Every recession ends with firms cutting their workforce to the bone and making do with less. However, it is one thing to ask workers to “sprint” for a year and another to impose a permanent shrinkage in the labor force. Recessions have always ended with workers being squeezed and some jobs permanently lost, but for most companies the draconian cuts of the recession have not been sustainable.
4. Firms have sharply cut hours and can expand output by restoring a normal work week rather than hiring workers. While there has been a sharp decline the length of the work week, it is not out of line with what normally happens in a big recession. In this recession overall work hours fell 7.4 pp, with 2.2pp due to shorter work hours and 5.3 pp due to cuts in employment. That’s about the normal division of lost labor: looking back over the previous 5 recessions where we have data, the cut in the work week has on average accounted for 36% of the lost hours. It is true that a good chunk of the recovery in hours worked will come from people working longer hours, but as in past recoveries we expect some of the gain will be in jobs.
So much for playing defense, let us go on the offense: why is this job recovery likely to be stronger than the last two feeble recoveries? We believe that US companies over-reacted to the recession. Fearing a depression they not only cut jobs aggressively, but inventories, investment and anything else that moved. That hunker-down mentality has spilled over into the early months of the recovery.
Chart 2 illustrates the over-reaction. It compares the lost output and lost work hours for the nonfarm business sector in the 11 recessions in the post-war period (we have excluded the brief 1980 recession). Most recessions are along the “regression line.” By contrast, in the current recession hours have been cut about 2.5% more than normal. This gap will get even bigger if the Bureau of Labor Statistics goes ahead with the revision it hinted at in the latest jobs report. This overshot is confirmed by data showing unusual strength in productivity during the recession. If you are thinking you are working too hard lately, you have company.
But which do you buy?
Jobless, job losses or job-full?