• Payrolls increased by 103,000 workers in December. • Service-sector jobs rose an average of 127,000 per month last quarter. • CFOs expect 2 percent job growth in 2011, or about 200,000 jobs per month. |
Better job growth is just around the corner. We’ve been hearing that for so long now that it’s starting to sound like an empty promise. The December jobs report didn’t help matters, with payroll gains coming in below expectations. Still, economists are standing fast by their upbeat projections for job gains in 2011. Why? Because the dark cloud of uncertainty hanging over U.S. businesses is finally lifting. Companies are starting to get a better view of the next year or two, and they seem to like what they see, which means Corporate America is ready to take the job market to the next level.
Job growth through the end of last year did, in fact, pick up, just not as fast as analysts, investors and policymakers would like to see. Businesses increased their payrolls by 103,000 workers in December, the Labor Department said on Friday, and revisions for October and November put job gains in those months 70,000 higher than first reported. The unemployment rate fell to 9.4 percent, from 9.8 percent in November, although that drop partly reflected people who have simply stopped looking for work. Federal Reserve Chairman Ben Bernanke in testimony before Congress on Friday said that despite encouraging economic data, “Conditions in the labor market have improved only modestly at best.”
That much is clear about 2010, when gains in private-sector payrolls averaged 112,000 jobs per month, barely enough to hold the jobless rate steady, much less push it lower. But job growth is set to pick up speed. Gains in the big service sector, which employs 83 percent of private-sector workers, already look stronger, with increases averaging 127,000 jobs per month during the fourth quarter, the strongest quarter in three years. “We continue to expect that job growth will strengthen gradually over the course of 2011,” said economists at Barclays Capital in response to the latest jobs report.
The big restraint on hiring in 2010 was widespread uncertainty in the business community regarding everything from economic growth to taxes to election-year politics. Now, the fog is lifting. Chief executives surveyed by the Business Roundtable in the fourth quarter were the most optimistic in five years, with 80 percent expecting higher sales, 59 percent projecting increased capital spending on new equipment and construction, and 45 percent planning to lift their payrolls. Those numbers were each sharply above their third-quarter readings, and close to levels last seen in 2005.
Sentiment among chief financial officers polled by Duke University and CFO Magazine last quarter showed a similar bounce. The CFOs expect profits, which are already on a tear, to increase 20 percent in 2011. Nonfinancial corporations headed into the new year with a record $1.9 trillion in cash. Half the CFOs say they will continue to accumulate cash, but half say they will begin to put their money to work, to increase capital spending and make acquisitions. Plus, many say borrowing conditions have improved. Most important, the CFOs expect to increase their full-time payrolls by 2 percent in the coming year, a pace equivalent to about 200,000 jobs per month.
This growing optimism reflects the time-honored relationship between accelerating demand and business expansion. Simply put, companies have to see the pickup to believe it, before they are willing to commit money to expand payrolls and facilities. Right now, consumers are giving the go-ahead. Reflecting surprising strength in retail sales and car buying, economists say fourth-quarter consumer spending is on a path to grow between 4 percent and 4.5 percent. Such a gain would be about twice the pace in the previous three quarters and the strongest in at least four years.
Spending will get a further lift in the first half of 2011, as employment income picks up and as lower payroll taxes that kicked in on Jan. 1, part of the tax compromise legislation, also boost spending power. That compromise, which also temporarily extended the Bush tax cuts and jobless benefits, also cleared away some uncertainty, while adding a surprise tax incentive aimed at spurring more capital spending on equipment.
The strong advance in equipment spending during the current recovery is another sign that payrolls have some catching up to do. Historical patterns show a tight correlation between the growth of business outlays for equipment and the growth of payrolls. Until recently, equipment spending had been concentrated in productivity-enhancing high-tech hardware. Early in the recovery, tech outlays accounted for all equipment spending, but in recent quarters companies have started to shell out for items more associated with expansion. Outlays for industrial machinery increased at a 24 percent annual rate over the past two quarters, while transportation equipment is up 70 percent. More equipment means more people needed to run it.
Labor demand is clearly on the rise. A separate Labor Department report showed a large increase in job openings at the start of the fourth quarter, and the average workweek, which stood at a two-year high of 34.3 hours in December, is now close to its prerecession level. Companies have stretched their work weeks to the limit and now face the need to add more workers in order for output to keep up with demand.
The most convincing sign of improving job markets is the sharp drop in first-time jobless claims over the past three months, even after last year’s extension of benefits. Declines in claims tend to foreshadow job growth by a couple of months, and economists at J. P. Morgan Chase say the decline in filings is a sign that labor demand is turning in a way that will boost employment and reduce the unemployment rate.
Business decision makers are never free from uncertainty, and 2011 will continue to offer questions about everything from health care to budget deficits to credit conditions. However, rising business optimism is a key sign that the biggest question mark is being answered: The economy is finally moving to a faster track, and businesses are ready and able to expand their operations — and their payrolls — to take advantage of the new opportunities.
Related Links:
For the Jobless, Cold Comfort in Improving Economy (Huffington Post)
Jobless Rate Masks Depth of Labor Woes (Wall Street Journal)
Bernanke See Slow Drop in Unemployment Amid Recovery (Bloomberg)
