The Case for an Upside Surprise in Job Growth


These days, the subject of job growth in the U.S. resembles what Mark Twain famously said about the weather: Everybody talks about it, but no one ever seems to do anything about it.

But job growth isn't just fodder for idle conversation. For a variety of reasons, it has to occur. The most important reason: For the U.S. economic expansion to continue, new jobs must be created. True, GDP, which grew 2.2% and 5.9% in the third quarter and fourth quarter of 2009, respectively, can expand for awhile -- perhaps a year or so -- without job growth.

But longer-term, employment must increase for the recovery to endure. It's the key to increasing aggregate demand that's so critical to sustainable GDP growth and, by extension, to rising corporate revenue and earnings. The good news is the outlook for job growth may not be as dire as some predict, particularly if the U.S. catches a break or two.

A Growing Population Needs More Jobs

Beyond generating corporate profits, job growth is also critical from a social standpoint. That's because the U.S. isn't a nation with steady population or a mature economy as one might see in Europe. Do you have a son or daughter graduating from college in May? Or perhaps you're graduating yourself?

Then you understand the situation: The number of adult Americans eligible for work is constantly increasing. Hence the U.S. economy, which lost 36,000 jobs in February, has to create about 100,000 to 125,000 jobs each month, just to keep the unemployment rate from rising.

Ideally, economists and public-policy professionals would like to see upwards of 200,000 new jobs per month, not only to accommodate adults entering the workforce but also to reduce the nation's unemployment rate, currently at a totally unacceptable 9.7%.

The Rays of Light

Where, then, are the jobs going to come from?

The bad news is the issue has no quick and simple solutions. The U.S. economy is undergoing structural changes, and credit markets are still healing from the financial crisis Each will weigh on job growth in the years ahead.

Still, the first reason for a realistic-but-hopeful outlook concerns the much-maligned U.S. manufacturing sector, even though it's no surprise that it doesn't exactly inspire euphoria. The country has lost about 2.2 million manufacturing jobs since the recession started in December 2007, according to U.S. Labor Department data, and most of those are not coming back. That's because many have been transferred to lower-cost factories in other countries, particularly China.

The ray of light in manufacturing? The sector has added jobs in the past two months. Again, the number is small -- a net increase of only 21,000. But the important point concerns the sector's overall condition. No one expects manufacturing activity to substantially lower unemployment, but if the current trend holds, it won't be adding to joblessness either, as it did in 2008 and 2009.

Second, business investment, as Lisa Emsbo-Mattingly, Fidelity Investment's director of economic analysis points out in a Q&A published on its website, will likely lead to hiring as the expansion continues. She notes that the 2001 recovery occurred on the heels of tech capital spending that had been growing at 20% a year through much of the 1990s. But capital investment had not been growing before the current recession, and companies were also cutting employees. Assuming an improvement in demand, businesses will need more bodies, Emsbo-Mattingly said, adding that she expects the labor market to perform better than expected.

Not the Stuff of Headlines

Third, the U.S. export picture is improving. Exports are a kind of the unsung hero of the U.S economy -- they don't get a lot of media coverage. If Home Deport (HD), Ford (F) or Costco (COST) announces they're going to hire 10,000 or 20,000 employees in 2010, the business media will probably make that their top headline. But rarely does an increase in exports get the same attention.

Still, the fact remains that U.S. exports, aided by the weaker dollar, rose an impressive 22.4% in 2009's fourth quarter after jumping 17.8% in the previous quarter. And while few economists expect that torrid pace to continue, if U.S. exports keep increasing at a double-digit rate, that bodes well for U.S. hiring by companies doing business abroad.

Next, this recovery is young, but there are signs that a major strength of the U.S. economy -- its remarkable ability to adapt, innovate and renew itself -- is starting to work its magic. Along with high-end technology-intensive manufacturing, it seems that info tech, infrastructure work, health care services, education, renewable energy and biotech will add more jobs than expected as the expansion continues. That trend will have be sustained to keep job growth adequate and make up for the millions of jobs lost in low-end manufacturing via globalization and in home construction following the housing bust.

The Need for a Bit of Luck

Finally, as is often the case when good things occur in business or in the economy, the job growth picture will get brighter if the U.S. can catch a break. In this case, stable oil prices. Rising oil prices cut U.S. GDP growth and slice consumer spending via reduced disposable income. Rising oil prices also increase business operating costs.

If a barrel of oil, currently about $81, doesn't move back toward $100, that will keep average gasoline prices at or near $3 per gallon -- high, but not devastating. Sustained oil prices above $100 will really cut into U.S. GDP growth. Conversely, sustained prices below $60 will increase disposable income and consumer spending, further stimulating job growth.

In sum, no one -- certainly not investors -- should be Pollyanna-ish about the U.S. economy. The job-growth problem is substantial and will take years to overcome. But neither should one be swayed by the at-times overly negative outlook expressed in some circles. Investors should keep in mind that across generations in the modern era, the U.S. economy has shown a remarkable resilience. There's ample reason to expect that history to repeat.