Is Recovery Without Jobs Now the Norm?

For months, economists have been reassuring Americans that the employment market drought will soon end.

With corporate profits surging and economic indicators improving, they said, it won’t be long before there is a downpour of jobs. After all, history shows that strong economic growth is quickly followed by robust job creation.

With this recovery, that still hasn’t happened. Most economists aren’t ready to throw out the history books, but the release month after month of disappointing payroll-gains reports has raised troubling questions about whether there has been a profound change in the way the U.S. economy operates: With advances in technology, rising productivity rates and the outsourcing of work to foreign countries, more economic activity won’t translate into more jobs.

“I’m growing increasingly suspicious that something more fundamental may be happening to the job market and the economy,” said Mark Zandi, chief economist at Economy.com, a research and consulting firm in West Chester, Pa.

The government’s latest employment report showed that employers nationwide added a puny 21,000 nonfarm jobs to payrolls in February. The California jobs report for last month, due this Friday, is likely to be as grim.

The jobless recovery, nearly 2 1/2 years old, has gone on too long to be called an anomaly or a blip, Zandi said. “Even if the economy finds its way and creates jobs,” he added, this strange time will be remembered as “part of economic lore.”

If the past pattern of growth no longer holds, the implications are enormous.

Of course, for would-be entrants to the labor market, and the 8.2 million Americans who are officially jobless, the specter of fast economic growth without much hiring is discouraging. And on the political front, the lack of new jobs is weighing on President Bush’s reelection bid.

But economists have another concern: If hiring remains sluggish for several more months, it could dampen consumer spending, which has been a major stimulant for the economy. The recovery, then, could be derailed.

At this point, most analysts don’t see that happening. “Our view is still that it’s not a question of whether but when the job recovery will take place,” said Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis.

Some say it might already be happening. They contend that the chief monthly Labor Department report understates the gains because the agency surveys establishments that have one or more workers on the payroll. The agency counts the self-employed in a separate survey of households. And in fact, the household reports suggest that there has been more employment growth than the payroll reports indicate.

Most economists agree that the next few months will tell whether there has been a temporary or a permanent shift in the relationship between economic and job growth. There are, after all, short-term factors to consider: Employers are still feeling a bit unsure about the recovery, for example, and they have tax incentives to invest more in equipment and capital rather than labor.

The last recession officially ended in November 2001. And in recent months, the nation’s broadest measure of economic output, gross domestic product, has been on a tear.

Real GDP grew at an average annual rate of 6% in the second half of last year and probably has slowed only slightly in the first quarter. Business spending is rising, as are U.S. exports, and low interest rates and federal tax cuts have added plenty of juice to the economy.

At the same time, by the Labor Department’s tally, nonfarm employers in the United States added an average of 60,000 jobs a month since August -- an annual growth rate of about 0.5% and about one-third of what economists had been projecting.

Compare that to the economic recovery of a decade ago: In that business cycle, the recession ended in March 1991 and it wasn’t until about a year later that GDP growth shot up to about 4%. But the rapid growth was accompanied by accelerating payroll increases.

By 1993, the U.S. economy was on its way to creating about 230,000 jobs every month.

One explanation for the difference between then and now is increased productivity. Businesses can produce more with fewer employees because they are squeezing ever more output per hour from their workers.

At nonfarm businesses, productivity rose by 4.2% last year, after a jump of 4.9% in 2002 -- marking the best back-to-back improvement in more than 50 years.

In the fourth quarter, productivity slowed to a rate of 2.7%, leading economists to believe that employers would have little choice but to ramp up hiring. But a look at the paltry jobs gains in February suggests productivity may have picked back up again, BofA’s Reaser said.

“Structurally, productivity growth does appear to be running at higher rates than the past; that’s a fundamental change taking place in the economy,” Reaser said.

Another big change is corporate America’s increasing willingness to outsource white-collar jobs, whether it’s farming out bookkeeping to an independent contractor in another state or shifting entire call centers or software development to India, a subset of outsourcing known as offshoring.

In the case of offshoring, U.S. companies generate jobs that don’t count in the Labor Department tally. And when companies outsource, some of the work ends up being performed by freelancers, independent contractors and others who are self-employed and therefore don’t hold “payroll” jobs.

Big companies such as GE Capital and IBM have been outsourcing for years. And small firms have been taking a page from their playbook.

Stephen Roach, chief economist at Morgan Stanley, has argued that offshoring is a big culprit in the jobless recovery. Roach said a “global labor arbitrage” had turned the labor market upside down, and may be indicative of a “fundamental breakdown in the time-honored relationship between aggregate demand and employment.”

Ken Gaebler, president of Walker Sands Communications, a Chicago-based marketing company, said business had jumped 20% since the second half of 2003, helping lift revenue last year to just under $1 million. He hasn’t, however, added a single person to the three-member payroll, instead handing the extra work to contractors, some in Ukraine.

Gaebler also said he had a reluctance to hire: He ran a dot-com company that went under in 2001, and he had to fire 100 people.

“Our mode is not to hire in advance of the business -- or even if the business doesn’t stick around for a while,” he said.

Multiply Gaebler’s experience by tens of thousands of other managers, and there could be another explanation for the jobless recovery.

Edward Leamer, director of the UCLA Anderson Forecast, said many firms in the roaring 1999-2000 period went on a hiring binge, “basically hiring everybody who crawled on the street.” So, he said, it’s taken longer to “work off the fat.”

Even accounting for that, Leamer said he was surprised that there hadn’t been a turnaround by now.

“Everybody’s been thinking tomorrow,” he said, “and tomorrow never seems to come.”