U.S. Macroeconomic Conditions
The U.S. economy entered a soft patch in the spring, growing at an annual rate of less than 2 percent, and is expected to continue weak growth through the first half of 2013. This slowdown is mainly a result of several factors:
1) Fear of the fiscal cliff - The most likely scenario is that more than two-thirds of the cliff would not be implemented in the coming months. Still, the uncertainty surrounding the “fiscal cliff,” as well as its true consequences, are already suppressing business spending. In particular, business investment started to shrink in the third quarter.
2) The global economy is weak - As a result, U.S. exports and revenues of multinationals, as well as overall consumer and business confidence, are suffering. In fact, mostly due to operations in the rest of the world, corporate profits are slightly declining, giving businesses an additional reason to cut spending.
3) Government spending is shrinking - In the past year, state and local governments have slowed down their spending cuts, but federal government spending is still shrinking.
However, there are several developments that are likely to offset some of these headwinds: Pent-up demand for some types of household spending is boosting economic growth. In particular, new spending on housing and automobiles is growing rapidly. The state of the U.S. household’s balance sheet is improving, which sets the stage for stronger spending in the future. In addition, the Federal Reserve is extending its efforts to keep interest rates at historically low levels.
In this environment, the U.S. economy will continue to grow slowly. The Conference Board expects the U.S. economy to grow by less than 1.5 percent (annualized) through the first half of 2013. However, for the first time in several years, we foresee that these conditions leading to economic slowdown will subside enough to achieve sustainable, above-trend growth in the U.S. economy towards the end of 2013.
U.S. Labor Market Conditions
Given the weakness in economic activity, it is no surprise that job growth is still struggling to recover. In the past six months, U.S. employers added 137,000 jobs per month. In a typical expansion, this number is well over 200,000. The rate of job growth is supported by what seems to be a lower trend of productivity growth. That means that for a given increase in demand and production, employers will expand their workforce faster than they did during the past two decades.
Quit rates, which heavily depend on overall labor market conditions and remain at low levels, were essentially unchanged over the past six months. Despite the labor market expanding over the past three years, quit rates still remain well below pre-recession levels for most industries. However, within industries such as mining and logging, quit rates have nearly reached their pre-recession levels. On the other hand, employees in industries such as finance and insurance, as well as federal employees, are still much less likely to quit than before the crisis. The weak recovery in the labor market suggests that quit rates will not continue to rapidly rise in the near term.
Unemployment and labor shortages
Despite disappointing job growth, one of the more surprising aspects of the current labor market recovery is that the unemployment rate has actually been declining quite significantly—decreasing from a peak of 10 percent in October 2009 to 7.9 percent in October 2012. This unexpected recovery is mainly due to a slowdown in the growth of the working age population.
In the coming year, less than 100,000 new jobs per month could be enough to lower the unemployment rate.
The decline in the unemployment rate, along with the retirement of the baby-boomer generation, is gradually turning labor shortage into a concern for many employers. While overall it is relatively easy to find qualified workers in the current market, in certain occupations, the unemployment rates are almost at pre-recession levels. In fact, within these professions, average hours worked has actually surpassed pre-recession levels. Both of these conditions suggest a tighter labor market. The occupations most likely to face significant shortages in the near future are extraction, mining, and STEM occupations.
The trend of historically low compensation growth, measured by the employment cost index, has continued at 1.9 percent in the last 12 months through September. This includes a 1.7 percent increase in wages and salary, and a 2.6 percent increase in benefits. Why is the wage growth still so slow?
First, past recessions also suffered from slow wage recovery. So long as the unemployment rate is above its normal levels, downward pressures on wage growth persist. This situation is especially reflected in the wages of new hires entering the labor force or re-entering after unemployment. Also, growth in state and local governments’ wages is weak. Third, the slow growth in benefits reflects both the weak labor market and an ongoing trend of slowing growth in health care benefits. In the past two years, health care benefits grew by an annual rate of 3 percent, versus 7 percent in the decade prior to the recession. Finally, in 2010, there was a surge in the growth of total benefits, such as the re-institution of benefits that were taken away during the recession, such as 401k matching, but this surge has now subsided.
Outlook for 2013 and Beyond
In October, the Employment Trends Index bounced back, but only to the level of July and August, which is still weak. Along with a pessimistic forecast for GDP, this circumstance suggests that employment growth is likely to remain weak through the first half of 2013, but will later accelerate as economic conditions improve.
Given the slow growth in working age population, if employment growth remains weak in the next few quarters, we should still expect the unemployment rate to remain at about 8 percent, and start declining again by the second half of 2013.
The main factors impacting current wage growth will also signal a continued trend of weak wage growth in 2013:
- A persistent high unemployment rate;
- The fact that corporate profits stopped growing, and, for many companies, even started declining in recent quarters, unleashing new efforts to cut costs; and
- The likelihood of inflation remaining low in 2013.
Beyond 2013, wage growth is likely to accelerate as economic conditions improve, and the ongoing retirement of Baby Boomers tightens the labor market. Wage growth is likely to be faster in occupations facing tighter labor markets, which also tend to be the higher paying occupations. For the foreseeable future, wage inequality is likely to continue increasing.
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