It's High Time for Companies to Start Adding Jobs

Before you go, we thought you'd like these...
Before you go close icon

Is there any hope for our economy when unemployment has been so darn stubborn?

Recently, much of investors' fretting has turned to Europe on a macro level or to more micro concerns like the seemingly botched transition at Netflix (NAS: NFLX) or the bumbling management change over at Hewlett-Packard (NYS: HPQ) . I'm not going to say that you shouldn't worry about those things -- particularly if you're a Netflix or HP shareholder -- but if we can't figure out how to put people to work here in the U.S., the rest could prove to be details.

The headline numbers -- a 1% second-quarter GDP growth rate and 9.1% unemployment -- are downright depressing. Digging a little deeper into the data didn't make me feel much better. For the first year that we were supposedly out of the recession, employment actually fell 0.4%. Thankfully, it grew 0.8% for the second year out, but that's not terribly encouraging when you're looking at nearly a tenth of the work-seeking population without... um, work.

Productivity bounced back nicely after the recession; for the first four quarters out of the downturn, productivity averaged a 4.5% annualized increase. However, that dropped off a cliff in the second year out, and the average growth rate fell to just 0.8%.

Null hypothesis
Being the optimist that I am, as I looked at the data, I was struck with the thought that maybe this isn't all that unusual. Perhaps employment doesn't rapidly come back after a recession, but instead makes a snowballing recovery over time.

Why would this make sense? Think about it from the perspective of a business. Coming out of a recession, you're (1) feeling burned from the cutbacks that you had to do during the recession and (2) very busy grabbing the low-hanging fruit from fully utilizing your equipment and being as efficient as possible. Why start hiring again until you've squeezed all the juice out of your current employees?

And if we look even further out, while employees can be let go if the economy doesn't continue recovering, it's tougher to get rid of new capital goods, so you hold off buying new equipment until things are humming along again and you've gotten everything you can from your current equipment and your new employees.

In a simple workflow view, the recovery process would be:


anImage

From a macro perspective, this would mean that we'd see a jump in productivity following a recession, and as it waned, hiring would start to pick back up. Finally, there would be gradual growth of new capital goods purchases, with most of the growth coming toward the very end of the expansionary phases.

What do the data say?
Pulling up the data -- which go back to 1947 -- I was immediately disappointed. On average, the post-recession periods didn't tell the tale I was hoping for. Instead, there was an initial bump in both employment and productivity, followed by lower growth in the second year, which was, in turn, followed by higher growth in the third year.

However, looking more closely at the individual recessions, I noticed that there seemed to be two distinct periods, with a fairly consistent recession-recovery pattern in each. Here's how that data shook out:

Period

1-Year-Out Average Productivity Gain

2-Years-Out Average Productivity Gain

3-Years-Out Average Productivity Gain

Pre-1970

6.0%

1.2%

2.3%

Post-1970

3.8%

2.2%

1.9%

Period

1-Year-Out Employment Change

2-Years-Out Employment Change

3-Years-Out Employment Change

Pre-1970

4.6%

2.5%

1.5%

Post-1970

1.6%

1.8%

3.0%

Source: Department of Labor.

Before 1970, productivity and employment both made their biggest jump immediately following a recession, and then growth in both -- particularly employment -- fell off in the years that followed. In the post-1970 period, productivity made its biggest jump following the recession, but employment growth continued to trend up in the years that followed.

As for capital goods, the data available are only available annually, so it's not quite as precise, but a similar pattern seems to hold. In the earlier recessions, the strongest growth in nonresidential fixed-asset spending came immediately after the end of a recession. In later recessions, the growth was more modest coming out of the recession and continued to gain steam generally all the way into the next recession.

It's different this time
As long as we're focusing on data from just the past 60 years, it's really not unfair to say that it's different this time around. This recession has been much longer and deeper than your average post-Great-Depression recession and has left a tremendous number of people out of work.

Of course, that means that if the pattern above is actually a sign of better (or just more conservative) business management -- that is, maximally utilizing available labor and capital before deploying more -- then it could be that the length and depth of the recession has simply stretched the timeline of the recovery ramp on the other end. That would mean that growth in both employment and capital spending would continue to ramp upin the quarters ahead.

You don't believe me
And understandably so. Perhaps it's because you have data that tell a different story. Or perhaps you're just so convinced by the grayish-black economic clouds that we can't seem to chase away.

But consider this. Corporations are not in dire shape. Far from it. Corporate profit margins are ridiculously high. Company cash balances look like Scrooge McDuck's vault. And with the Federal Reserve stomping on interest rates like Super Mario on a Goomba, there's only so much time that they can justify holding onto that cash rather than putting it to work in some higher-return fashion.

In other words, corporate efficiency and resources are currently very high, but those levers are unlikely to be viable sources for the growth that companies and Wall Street love so much. So what happens next? Increasing production through hiring more workers and purchasing new capital goods.

And if you're investing?
If the pattern above holds, the expectation would be for more hiring and spending on capital goods as the recovery gains steam. The hiring part would put more money in consumers' pockets as they get rehired or hired for a better job. This could justify looking at companies like Ford (NYS: F) , Coach (NYS: COH) , and, yes, perhaps even Netflix, that could benefit if consumers start spending more.

Meanwhile, companies like Intel (NAS: INTC) , EMC (NYS: EMC) , and GE (NYS: GE) may be on the receiving end of snowballing increases in capital spending. Heck, the "can't get out of my own way" HP could even see increased demand for its servers.

Of course, if this turns out to be a reasonable expectation for how the economy will proceed in the next few years, choosing the optimal industries may be helpful but not absolutely necessary as the rising tide should lift most boats.

To follow any of the companies mentioned in this article, add them toMy Watchlist.

At the time this article was published The Motley Fool owns shares of Coach, Ford Motor, and EMC. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Ford Motor, Netflix, Intel, and Coach; creating a diagonal call position in Intel; and creating a bear put spread position in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Fool contributor Matt Koppenheffer owns shares of Intel, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners