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Why this recovery feels so painful
Sure, the economy is growing again, but the employment picture remains worrisome. You can blame higher productivity and global pressures.
By Jim Jubak
Call this the Wal-Mart recovery. The economy shows great growth, but everybody gets squeezed on costs until it really, really hurts.
After months of plodding along, the economy suddenly raced ahead in the third quarter. The gross domestic product surged 8.2% in the period after growth of just 3.3% in the second quarter and 1.4% in the first quarter and 2002's last quarter.
It looks like that growth spurt is real, too. Some economists now are forecasting that the economy will grow by 5% or better in the fourth quarter of this year and the first quarter of 2004.
This great growth story hasnt yet produced the kinds of gains in jobs or incomes that an economic recovery typically creates by this point in the business cycle.
The number of people filing new claims for unemployment did manage to finally fall below 400,000 in October. (Above 400,000, economists say, the economy is continuing to lose jobs.) But initial claims for unemployment remain stubbornly high, indicating that this economy isnt generating many new jobs. In addition, the high level of continuing unemployment claims shows that the economy still isnt making any real dent in replacing the 2 million jobs lost since the recession began in 2001.
Personal income is higher if you include the effects of the Bush tax cuts and home mortgage refinancing at lower interest rates. The dollars that tax cuts and refinancing put in consumers' pockets are real and have been a key to keeping the economy going during the roughest stretches of a collapse in business spending. But those gains wont increase in size over the next few quarters. (Nobody who refinanced a mortgage to save money at 5% can save more money by refinancing at 6%.)
Going in the wrong direction
Take the effects of tax cuts and home mortgage refinancings out of the income calculations and income is falling even as the economy is growing.
Wal-Mart Stores (WMT, news, msgs) has seen this squeeze on income turn up in data generated from its sophisticated inventory systems that can track customers' buying patterns in excruciating detail. The company says its customers are concentrating more and more of their buying into the days near the middle and end of the month when paychecks arrive. This has created two discernable lumps in Wal-Marts sales, which make up about 9% of U.S. retail sales. (The companys customers have an annual family income of about $41,000, about $1,000 less than the U.S. median.)
Doing more with less and shipping jobs overseas
What Wal-Mart is seeing (and probably other retailers as well) tells us that the recovery is a mixture of good news and bad news.
- Good news: strong gains in productivity in the economy, climbing at an annual rate of 4.7% in the third quarter, are boosting company profits and keeping inflation low. And the higher productivity growth is, the faster the economy can grow.
- Bad news: Strong productivity growth is one factor helping to hold down job growth. If employers can get more out of current employees, they have less need to add new workers.
- More good news: the integration of China and India, especially, into the global economy is driving down the costs of goods and services, a positive for the U.S. consumer.
- More bad news: The global economy is exerting relentless downward pressure on U.S. wages and on U.S. employers. The average hourly wage for U.S. manufacturing jobs is $14.50; in China, its 61 cents. No wonder that so much manufacturing has moved from the United States, Europe and Japan, and even from Mexico, Brazil and Taiwan, to China.
Even highly paid high-technology jobs are headed overseas. For example, the starting salary for an engineer in India ranges between $7,800 and $12,000 a year. In the United States, the starting salary for a comparable engineer is about $43,000. And India is graduating about 300,000 new engineers a year.
Feeling the squeeze
That salary squeeze couldnt be coming at a much worse time for U.S. workers since their paychecks are being squeezed by rising costs for health care, property taxes and education, to name just three big ticket items.
Some 56% of U.S. employers raised health-care premiums, deductibles or co-pays in the last year, according to Watson Wyatt Worldwide. Some 18% now charge an extra $100 a year for family coverage if the employees working spouse declines coverage from his or her own employer.
Sometimes, the squeeze is even more direct. In the last 12 months, 12% of U.S. employers simply cut benefits, with another 6% planning to do so next year.
Some of this pressure will lessen, if not completely go away, as the recovery continues and companies feel they can start giving out raises again and become confident enough to hire full-time workers with benefits. Watson Wyatt found that 45% of U.S. employers reduced their budgets for salary increases in the past year, and 16% eliminated or severely reduced their budgets for bonuses. Next year, only 12% of U.S. employers are planning to reduce their budgets for salary increases and only 5% will slash the bonus budgets again.
But much of the Wal-Mart economy will be with us no matter how fast the business cycle turns. Globalization will bring changes in incomes, prices and profits that will work themselves out only over decades. That process will still be with us when the current recovery is old in the tooth, and its likely to outlive the next recession and the recovery from that downturn, too.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak did not own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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