- James I. Clark III
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Where’s Our Recovery? Job Growth and Productivity Falter
Sluggish job growth in May could be a sign that the economic recovery is losing momentum.According to the ADP May Employment Report, a mere 38,000 jobs were added in the private sector on a seasonally adjusted basis. That was well below consensus estimates of 170,000 new jobs. The report also revised downwards the estimated change from March to April from 179,000 to 177,000. “A deceleration in employment, while disappointing, is not entirely surprising,” the report said. “In the 1st quarter, GDP grew at only a 1.8 percent rate and only about 2¼ percent over the last four quarters. This is below most economists’ estimate of the economy’s potential growth rate and normally would be associated with very weak growth of employment.”
Patrick O’Keefe, director of economic research at J.H. Cohn, said that although some seasonal factors may have been at work in the recent claims data and in the ADP estimates, the report still disappointed. “We can put away our balloons and party hats today,” he said. “We expected a pull back in the rate of acceleration, instead we got deceleration. It appears that the general expansion has lost a bit of momentum and employment numbers, which were already lethargic, are slowing further.”
“This only adds fuel to the argument that the slowdown story is here in the U.S.,” said Tom Porcelli, chief economist at RBC Capital Markets. “I am fairly confident that people are going to be scaling back their estimates for nonfarm payrolls. While it is a good thing that small and medium-sized companies are adding payrolls, there is no doubt that the pace has slowed. This is exactly what we do not want when other significant data shows things are slowing down as well. Having said that, I still do not believe the Fed will initiate QE3.”
Writing in the National Journal, Jim Tankersley takes a more optimistic viewpoint. According to Tankersley, “Reality is a little more positive and a lot more complicated than that. Wall Street analysts are fairly united in their view that the recovery has entered a “soft patch,” just like it did last year, and that sooner or later, growth and job-creation are on track to pick up again. Several analysts and columnists have been reminding Americans that recoveries from financial crises can often feel like stop-and-go traffic on the freeway. For now, the economic brakes seem to be pumping. The 2010 slowdown flowed from worries over Europe’s sovereign debt crisis. This one is likely a combination of several factors. The spike in oil and food prices has spooked confidence — though consumers are still spending apace, dipping into their savings to keep up — and may be driving businesses to scale back hiring.”
On the MarketWatch website, Rex Nutting says that “If you recall that government employment is declining by almost that much every month, the ADP report implies only a very small increase in total employment. This is no way to get the unemployment rate down from nine percent. The economy has been buffeted by both natural and man-made forces. Extremely bad weather earlier in the year depressed activity, as did the surge in commodity prices, especially for energy and food. Then the Japanese earthquake and tsunami knocked out vital supply chains. Global economic growth, which had given a big boost to U.S. exporters, is slowing. Europe is dead in the water, so is Japan. The fast-growing developing nations such as China, India and Brazil are downshifting to avoid overheating. The strongest sector of the U.S. economy — manufacturing — is still growing, but the momentum is fading. The Institute for Supply Management’s closely watched diffusion index (Defined by Investopedia as “A measure of the breadth of a move in any of the Conference Boards Business Cycle Indicators (BCI), showing how many of an indicators components are moving together with the overall indicator index) plunged by 6.9 points to 53.5 percent in May, the largest one-month decline since 1984.
Companies may need to start hiring again as a new report from the Department of Labor is showing that the productivity of American workers slowed in the 1st quarter and labor costs rose as companies boosted employment to meet rising demand. The measure of employee output per hour increased at a 1.8 percent annual rate after a 2.9 percent gain in the prior three months, revised figures from the Labor Department showed today in Washington, D.C. Employee expenses climbed at a 0.7 percent rate after dropping 2.8 percent the prior quarter.
Productivity measures the amount of output per hour of work. A slowdown in growth is bad for the economy if it persists. But it can be good in the short term when unemployment is high because it can mean that companies are reaching the limits on how much extra output they can get from their existing work forces. Output grew 3.9 percent in 2010, the biggest increase since 2002. But many economists believe it will slow to 50 percent of that rate this year. The expectation is that companies will hire new workers to further boost output.