GDP / Jobs Disconnect ?

Since the second quarter of ‘03, its been my thesis that this has been a unique recession/recovery cycle. What marks this run as rare in the post war (WWII) environment has been high productivity, continued consumer spending, weak manufacturing, and continued job loss, set against a backdrop of historical levels of stimulus.

The high productivity numbers (+2.5%) plus the increase in labor pool (+1.3% trailing 12 months, according to NDR) meant that it took at least a 3.8% GDP to merely break even — that is, to not lose any jobs.

Now comes a new survey from Chief Executive Magazine (CEO Mag) that makes the somewhat pessimistic “New Productivity Paradox” thesis look overly optimistic.

William Holstein is Editor-in-Chief of CEO Mag. His organization regularly polls their members, hoping to glean some insight from what CEOs are thinking. His most recent survey is quite disturbing in its findings:

CEOs, according to Holstein, are not planning to do much in the way of hiring in the U.S., regardless of the rate of GDP growth. Their focus on making the next quarter’s numbers is why they feel they must continue to run as lean as possible. Outsourcing, particularly to India, is where the new bodies will come from. (See India Economic Times: Service advantage of Indian IT offshore model”)

Headcount increases will be in New Delhi, not New York.

The pundits are fond of saying that once economic growth rate picks up (i.e., improvement in GDP), domestic hiring will follow. Holstein disagrees with this thesis, calling it a “false argument.” On CNBC this morning, Holstein said words to the effect of “There’s a disconnect between economic growth and domestic hiring.” He (or one of the anchors) described this not as a “Jobless recovery,” but as a “job-loss recovery.”

Is this an example of CEOs being too pessimistic at the bottom,just as they were too optimistic at the top? Perhaps. Wall Street itself is notorious for overhiring at market tops, and overfiring at market bottoms.

There’s no doubt that we are caught in a economic riddle; There are no historical parallels with which to compare this period to.

But consider this additional issue on the CEO survey: CEOs are divided over whether tax cuts are the way to improve the economy. When asked what sort of effect the present economic policies would have, 54% replied “Positive.” What’s startling is that 21% answered “Negative,” and 25% said the present economic policies would have no impact whatsoever.

Considering that this demographic is heavily Republican, the results of the survey were certainly surprising. 54% positive to 46% negative/neutral makes it apparent why executives are reluctant to hire people.

The Political Angle
There can be little doubt that this is yet another datapoint worth watching as we head into the 2004 Presidential elections. I’ve observed in the past that the managerial competancy/economic issues are the biggest potential vulnerability to the present occupant of the White House. So far, no one from the Democratic field has focused on this issue in a way that resonates with the masses. Nor have we seen a complete economic plan offered in an appealing way.

Its one thing to critique the existing policies; its another thing entirely to profer a credible alternative.

Confidence Surges, But Problems Persist

CEO Survey Report: Outsourcing – The Path to Achieving Business Transformation

India Economic Times: Service advantage of Indian IT offshore model

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  1. Yasser commented on Aug 23

    “There are no historical parallels with which to compare this period to. ”

    Japan, circa 1990-1995, is arguably comparable to the economic situation we find ourselves in right now.

    Stock market bubble? Check.
    Real estate bubble? Check. (althought this is arguable)
    Buoyant consumer spending after the bubble? Check.
    Possibility of liquidity trap? Check.
    Swelling unemployment? Check.

    You get the idea.

  2. Yasser commented on Aug 23

    Mind you, we aren’t hobbled by a rickety banking system or a sclerotic labour market, which is a large feather in our cap.

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