Big Picture Shrouded by Gloom in Northeast

Pity those economists who sit at their screens all day, scrutinizing the minute-by-minute minutiae of the financial markets. They tend to immerse themselves so much in the ebb and flow of the data that they are unable to see the forest for the trees. Some work for bond houses; they seemingly never met a statistic they liked. For you see, bearish economic numbers tend to lift bond prices because they imply lower interest rates, and these economists in particular must feel a need to help their firms sell bonds.

If this were not enough, consider the industry most economists work in, and the region where they are. I’m referring to the financial services industry and the Northeast--both of which have been hit harder than usual during the recent recession. But there is life west and south of the Pennsylvania border. Indeed, conditions in the Northeast notwithstanding, there is persuasive evidence of a slow but steady economic recovery building. Let me bring you up to date:

* Business sales are up for four straight months, the first such increase since 1989.

* Business inventories are at a two-year low, having fallen for six straight months, the longest such period in 8 1/2 years.

* Industrial production has climbed for five months in a row, the first time that’s happened in a year.

* The purchasing managers’ index of conditions in the industrial sector has climbed every month since January and stands at a three-year high.

* New-home construction, in the form of housing starts, has gone up for five straight months, the first time that’s happened since 1980.

* The government’s index of leading economic indicators rose six straight months (before leveling off in August)--the most in four years.

* Business payrolls have expanded by 224,000 in the past five months, compared to a drop in 1,025,000 during the previous five.

* More than half of all reporting industries are adding to their payrolls--the most since just before the recession began last year--while the weekly number of new claimants for jobless benefits has dropped substantially from their March peak.

These gains in employment may come as a surprise to many who work in financial services in the Northeast. And with good reason: 15 months after total employment reached a peak, jobs in what the Labor Department calls FIRE (finance, insurance and real estate) are down about 1%. By contrast, employment in this category continued to grow during the same period surrounding all eight previous postwar recessions. Needless to say, the Northeast has a disproportionate number of workers in the financial services industry.

Further cuts are in store. To compound matters, many who have lost their jobs may be unable to obtain employment in their fields. The Labor Department believes that this is most likely to happen those who are laid off by the federal government and by companies in financial services. As a result, many will have to settle for jobs paying less than those they lost. This may account for the growing incidence of part-time employment, as people take on a second job to bolster their incomes.

Although these displaced workers might not agree, there are several bright spots in this otherwise gloomy service sector picture. First, fewer workers can result in greater productivity. Service industries have been lagging in this regard--even though such innovations as personal computers, word processors, desktop publishing with laser-jet printing, fax machines and new telecommunications systems have become commonplace.

In turn, this will help keep labor costs down--especially important in this labor-intensive sector. Corporate profitability will benefit from this--and this is also important in today’s environment, where making a sale can be tough and boosting prices can be even harder. And, of course, this means that the progress made in slowing inflation will continue. Less inflation will help keep interest rates down, thereby ensuring that the nascent recovery will not come to an untimely end.

Because 80% of the workplace is in the service sector, this murky job outlook has understandably depressed the attitudes and buying plans of a great many families. The Northeast’s nabobs of negativism point to this, along with negligible income growth, a low savings rate and record debt loads as reasons not to expect much help from the consumer in the coming months.

And if consumer spending, which, as everyone must know by now, accounts for two-thirds of the gross national product, fails to rise, the ripple effects on the rest of the economy would be hard to overcome and a new (or continuation of the old) recession would occur.

Not to worry. The gloomsters are overlooking one crucial development: the ongoing improvement in the goods-producing sector. As noted, industrial production is in an unmistakable up trend. As also pointed out, this is not being accompanied by an increase in unsold goods. Indeed, quite the opposite is taking place: The five-month rise in production has accompanied a six-month drop in inventories. To put it bluntly, producers are not increasing output with the intent of adding to their stockpiles. Rather, they are trying to keep from being deleted too rapidly.

It doesn’t take a rocket scientist to figure out that even at this stage, more money is being earned and/or made available for spending. At some point, these expenditures will necessitate an increase in inventories, because it is awfully hard to sell products that don’t exist. It is only a matter of time before many companies conclude that more--not fewer--inventories are needed. For if there’s one thing worse than losing sales for lack of buyers, it’s losing sales for lack of merchandise.

In any event, the gains in output have already boosted incomes of factory employees by enabling them to work longer hours and find more jobs. Surely, this has led to increases in spending by consumers in some parts of the country; retail sales in the Midwest are up 2.5% compared to a decline of 1.5% in the rest of the country. It is only a matter of time before they bottom out elsewhere, since some service sector hiring will be needed just to keep pace with the rise in goods output and sales.

The current recovery, like the recession that preceded it, has many unusual aspects. Like the recession, it has gone unrecognized in its early stages by the cadre of vocal--but not necessarily accurate--economists who sit by their screens watching the markets.

Those who are willing to step back and put things in their proper perspective, however, can see that the glass is not half empty, but half full and getting fuller all the time.