Behind the Numbers
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TERENCE SMITH: Today’s unemployment number was the worst showing in 20 months, it climbed from 4.2% in February to 4.3% in March. Manufacturing shed 81,000 jobs last month, making a total of 450,000 such jobs lost since June. Service sector jobs were down, as were retail and temporary jobs. Unemployment was up, for African-Americans. Their jobless rate jumped from 7.5% in February to 8.6% in March, although those numbers are drawn from a smaller sample. One bright spot — construction firms added 12,000 jobs in March.
Joining me to walk through the numbers are Ed McKelvey, senior economist at Goldman Sachs and company, a Wall Street investment firm; Lisa Lynch, professor of international economics at Tufts University’s Fletcher School of law and diplomacy– she was chief economist at the Labor Department under President Clinton– and Ross DeVol, director of regional and demographic studies at the Milken Institute, an economic think tank. Welcome to all three of you.
Lisa Lynch, let me begin by asking you to read these latest numbers for us. Are they, do you take them as yet another sign of a slowdown?
LISA LYNCH: Well, certainly looking at the numbers today, we are seeing the continuation of the slowdown in the manufacturing sector. And if manufacturing is not in recession, it certainly is very close to being in recession. I think the real worry in today’s numbers was that up to now the service side of the economy has been able to pick up the slack from the decrease in employment in manufacturing. And that did not happen in the most recent numbers. And, in particular, we saw a sharp decrease in the use of temporary help employees, and temporary help agency employment. And manufacturing has used a lot of those workers, but they’re also using other parts of the economy.
So that’s sort of the sobering news. The second part of today’s report that’s going to give pause and kind of a Pepto-Bismol moment for Wall Street has to do with the wage numbers. Now wages — hourly wages were up out of 4.3% number in March, and that’s a much higher number than we had been seeing over the last two years where wage increases, hourly wage increases were on the order of 3.5 and 3.8%. So that gets people a little nervous about what might be happening both for profits for companies and inflation concerns more generally in the economy.
TERENCE SMITH: Ed McKelvey, were there some nerves on Wall Street today?
ED McKELVEY: Well, certainly you saw the market respond in a negative way. Some of that was probably due to other factors. But yes, I think the numbers put you a little closer to nationwide recession. They don’t put you in it. And I think the Street’s nervous about that. I would agree with most everything Lisa said except I would say manufacturing is very clearly in recession.
TERENCE SMITH: As an incentive or nonincentive for the Federal Reserve to cut interest rates, how do you read that?
ED McKELVEY: Well, this report probably doesn’t quite do it in terms of getting the Fed to move before its next meeting on May 15th. It may still do that, but there have been a number of mixed signals in recent data. And had this report been a lot worse, you might have seen the Fed move more quickly, but not quite yet.
TERENCE SMITH: Ross DeVol, when you look at the technology sector, what’s the message there?
ROSS DeVOL: Well, the message there is this might be the first investment led recession that we’ve had in the post-war period.
TERENCE SMITH: Meaning?
ROSS DeVOL: Meaning that the technology sector is playing a large role in the job losses at a very early stage. We look at some of the numbers, industrial equipment lost 16,000 jobs. Computers is in that category. Electronic components lost employment. And we’ve seen the communications equipment sector begin to lay people off. And these latest numbers don’t even reflect the job cut announcements that have already been made. Those numbers are going to be showing up very soon. So that’s what’s really troubling, is that this could very well be an IT equipment investment led recession, and the Fed doesn’t really have the weapons to correct that.
TERENCE SMITH: So it’s reaching beyond, for example, the dot com sector, more broadly into technology?
ROSS DeVOL: That’s correct. We all know the dot com stories, the venture capitalists push firms into the public market that didn’t have any profits. And we’ve seen the retrenchment from that, but now it’s affecting the real side of the technology sector, firms like HP, Intel, Cisco — those types of firms. We’ve seen Gateway announce they’re going to layoff additional people, and Dell in Austin, Texas is going to layoff 10,000 employees.
TERENCE SMITH: Lisa Lynch, how important and how long lasting are these numbers in the manufacturing sector?
LISA LYNCH: Well, we’ve seen manufacturing softness in the employment numbers in manufacturing going back to June of last year. I think what is troubling when you look at the manufacturing numbers is, as Ross said, that we’re seeing for the first time decreases in employment in sectors of manufacturing that had been increasing in employment during the year 2000. But I want to say, manufacturing is only one part of the economy. We did have some good news today in the jobs report. We had healthy continued growth in the construction sector. We have strong growth in health services, and sort of the other side of the investment-led IT new economy is that we had a lot of job growth in computer and data processing. So those companies that invested in new technology are putting people to work with that new IT technology.
TERENCE SMITH: Lisa Lynch, explain that construction number that went up when others went down.
LISA LYNCH: Well, we’ve seen more generally in the housing data for the economy continuation of growth in new housing and obviously the appointment that is associated with that. So, I mean, in terms of what people are doing in buying homes, people are still going out there and buying homes, and that’s consistent with the good numbers that we’ve got in consumer confidence. And that also suggests that if there is a continued decrease in interest rates, that that should continue, that investment in the housing sector of the economy.
TERENCE SMITH: Ed McKelvey, stepping back for a moment, isn’t this number still very low as an unemployment figure?
ED McKELVEY: Certainly is. We have seen a very low unemployment rate throughout 2000 and into 2001. The problem of course is that the economy really responds, the change in the unemployment rate is what reflects the growth rate. We’ve started most every downturn in the economy with what seemed like a very low unemployment rate. You really have to look at the net change, I think. And you’re not in a troublesome territory just yet. But it certainly is a bit worrisome that you’ve had an increasing pattern.
TERENCE SMITH: Ross DeVol, where is that troublesome territory?
ED McKELVEY: You mean where are we likely to go in terms of growth?
TERENCE SMITH: Or either or both of you — yes. Go ahead.
ED McKELVEY: I’m sorry, Ross.
ROSS DeVOL: Let me jump in. We’ve talked a little about manufacturing. We’ve lost 450,000 jobs in that sector. And let me agree with Ed, there’s no question the manufacturing is in a recession. It’s just a question of whether the rest of the economy is or not — the only thing that might save us. I think an important thing to look at is typically construction is declining at this stage in a economic downturn. What’s unique about this one is the Fed has been lowering interest rates and that has stimulated construction, which has acted as a stabilizing force.
But what I’m really concerned about at this stage is with all the announcements that earnings are going to be much more expectations, especially in the tech sector — and I think we’ll see more of those announcements come out, that it can become a self fulfilling prophecy in terms of the stock market reacts negatively to the poor earnings numbers, driving the stocks down further, forcing firms to announce additional layoffs. So I really view the technology sector as playing a key role here in determining just how well we go. It will be interesting to see whether or not the April employment numbers show decline. If they do, I would be ready to declare that we are officially in a recession.
TERENCE SMITH: Lisa Lynch, what about the psychological factor of all of this, when these numbers come out on both consumer confidence and the attitude towards the larger question of the economy?
LISA LYNCH: Well, look, in terms of the psychology, certainly the Goldilocks economy is over in the U.S.. But let’s not all become Chicken Littles and say that the sky is falling. There are bears lurking around. But we still have an unemployment number of 4.3%, which is extraordinarily low from a historical point of view. We have workers earning more money. We have consumer confidence high, we have strengths in the economy in the housing sector, in financial services and health care. And so we have a mixed picture, and I think that’s what drives everybody a little bit batty, because there’s not a clear message here. But there are obvious areas of concern, and that’s why you’re seeing the volatility that you’re seeing in the stock market.
TERENCE SMITH: Ed McKelvey, do you share that confidence in the underlying strength of the economy?
ED McKELVEY: Well, I think in the long-term sense it does have some underlying strength. I would take less comfort from the housing numbers for the simple reason that this is a sector that behaves a lot differently with the changes we’ve had in the mortgage market over the years. It currently is performing quite well, there’s no denying that. The concern I have is pretty much what Lisa suggested, that the behavior of the market could spark additional retrenchment by consumers. We have not seen that yet — at least to a great degree. And if that happens, then you could have a snowballing effect. We’re not there yet, we hope we don’t get there, we’re forecasting one percent growth, so we sort of narrowly escape here. But there certainly is an ongoing risk.
TERENCE SMITH: Ed McKelvey, in your first answer you talked about other factors that might have been involved in the market today, a downturn versus yesterday’s rush up, what did you have in mind?
ED McKELVEY: Principally was that rush up and that people were probably booking some gains, a rare thing on Wall Street these days. And so it wasn’t surprising to see the market open down even if there had been no news.
TERENCE SMITH: Ross DeVol, what should we be looking for, not only in technology, but more broadly as we go ahead?
ROSS DeVOL: I think what we want to be looking at is the consumer. So far consumer spending — growth has slowed down, but it’s still positive. And unless the consumer really cuts back, it’s very difficult to see a recession. So the jobs numbers and the consumer numbers and the consumer confidence are all interrelated. If consumer spending stays positive, I don’t think we’ll have a recession, one officially. So that is what you’re going to want to look at.
TERENCE SMITH: Lisa Lynch, do you agree, we can escape the “r” word?
LISA LYNCH: Well, I don’t think we’re going to see the “r” word in the short term. But we are going to see a lot of softness. We’ve had a very rapid heady period of growth in the United States, and you can sort of imagine that people are, we need to take pause, a little rest, get our digestion system going again, and then hopefully take off.
TERENCE SMITH: Ed McKelvey for the market what should we be looking for?
ED McKELVEY: Well, I think in the near term the market still is digesting some of that earnings news, and may have some difficulty. Our view on the longer term is quite optimistic. Markets often turn up quite ahead of when the economy turns up. So six to twelve months out I think you may be looking at better numbers in the market.
TERENCE SMITH: Okay. And very quickly, Ross DeVol, can we look to technology to help us here?
ROSS DeVOL: Over the next two to three months, I don’t think we’re going to see technology helping us much. Orders announcements have been very weak. It will depend to a large extent how much corporate investment budgets are cut back. That’s what will happen to IT, and I think we keep our eye closer on the information technology numbers, and if they don’t go too bad we’ll probably escape the “r” word. But we’ll be so close to it that it will feel very similar to an “r” word.
TERENCE SMITH: All right. Thank you, all three, very much.