Digital News Report – Editor’s Note: This is an excerpt analysis of current economic conditions we received from Morgan Stanly as part of their Global Economic Forum. They see moderate hiring and perhaps a partial recovery soon.
Here is a small portion of that analysis:
Job growth has yet to show up, but the great US employment recession is finally ending. The jury is still out on our thesis that employers went overboard in slashing payrolls and will start to hire back. At first glance, December’s decline of 85,000 in non-farm payrolls seems to refute that notion, but we believe that weather-related headwinds played a significant role in the result. More important, several signs point to positive job growth very soon. We expect job gains over this year of just over 1% (130,000 monthly), along with a consistent rise in the workweek.
It’s worth repeating that job and hours gains are critical for our call that growth will be sustainable through 2011. Rising jobs will provide the gains in income and confidence needed to support consumer spending. Rising income will also improve consumer creditworthiness and give lenders collateral comfort for further improvement in credit availability: It will reduce debt/income and debt service/income ratios, raise ‘cure’ rates for delinquent mortgages, and help more consumers qualify for a loan. In short, rising employment will greatly reduce fears of a weak and faltering recovery.
While we don’t think this recovery will be jobless, the pace of hiring is still likely to be moderate for three reasons: The economy itself still faces headwinds; companies remain determined to boost productivity; and uncertainty about labor costs, especially healthcare, may restrain hiring. Details follow.
Pent-up demand. Our thesis has been simple: Aggressive cuts to payrolls over the past two years have set the stage for a solid rebound, despite only moderate economic growth. What were minimal hiring excesses are long gone, and a growing economy has produced a hiring deficit. While there are several factors that will mute the hiring recovery, this pent-up demand will overwhelm them.
One measure of that pent-up demand is provided by a relationship between the economy and hours worked (and, with a projection for the average workweek, employment). The explanatory variables include the outlook for output, factors that affect productivity such as the services from capital, other variables aimed at capturing changes in trend productivity, and a dynamic adjustment process that captures the typical pro-cyclical surge in productivity early in recovery (see Appendix for equation).
If positive, the cumulative differences between actual hours and those predicted by the relationship suggest that there is an overhang of labor to work off. As it turns out, the errors over the course of the expansion that ended in December 2007 were small, reflecting business caution about hiring. And through 2Q09, the errors cumulate to zero, suggesting that the aggressive job cuts seen in this recession eliminated any excess six months ago. We estimate that declines through 4Q have pushed those cumulative errors sharply negative, implying some underlying pent-up demand for labor that should materialize soon.