[Home][About the Pulse of Capitalism][Subscribe][Copyright Notice][The Commonwealth Institute]

The Pulse of Capitalism

Issue Number 03-4, January 2004

[Translate] [Traduction] [Übersetzung] [Traduzione] [Tradução] [Traduccion]


International Comparisons
Business Activity Indicators
Financial Indicators - United States
Selected International Transactions - United States

Job Gains and Job Losses

One of the best economic indicators is the payroll employment data issued by the Department of Labor. It is compiled from reports submitted by thousands of employers, and is thus not subject to the vagaries of the unemployment data that is compiled from sample surveys. From 1992 to 2000, employment increased by 22.2 million jobs or 2.8 million per year, an extraordinary increase by any standard. Since 2000, there has been a loss of 1.1 million jobs.

The common view is that the current period is much like the l990-91 period, and we will soon be back on the happy path of the latter 1990s. This is not likely to happen for two simple reasons: first, we have excess capacity throughout the economy and, second, there is no new technology on the horizon such as the electronics after World War II in need of development. But people tend to believe that a trend that has persisted for some years will continue. To examine these questions, we will examine employment trends over two recent periods, 1997-2000 and 2000-April 2003.

Employment of workers on nonfarm payrolls by industry, in thousands

1997 2000 April 2003 Change
1997-2000 2000-4/2003
Total 122,690 131,417 130,348 8,727 -1,069

Goods producing 24,962 25,661 23,366 699 -2,295
-- Mining 596 538 559 -58 21
-- Construction 5,691 6,687 6,556 966 -131
-- Manufacturing 18,675 18,347 16,251 -238 -218

Service producing 97,727 105,756 106,982 8,029 1,226
-- Transportation/public utilities 6, 408 6993 6,627 585 -366
-- Wholesale trade 6,648 7,054 6,630 406 -424
-- Retail trade 21,966 23,137 23,107 1,171 -30
Finance, insurance, real estate 7,109 7,618 7,843 509 225
Services 36,040 40,384 41,395 4,344 1011

Government 19,557 20,570 21,380 1,013 810
Source: Monthly Labor Review, Table 12

This table emphasizes two major changes in employment trends over the past six years. The first is the drastic reversal. From 1997-2000 employment grew by 8.7 million jobs or 2.9 million per year, but from 2000-4/2003 employment fell 1.1 million or 0.5 million per year. This reversal was widespread - the second major change. Most of the lost jobs were in goods production, particularly manufactur- ing, with a decline of 2.3 million jobs. But goods production today accounts for less than one-fifth of all jobs. Services production created 2.7 million jobs per year in the 1997-2000 period but only .5 million in the succeeding period. Thus, in terms of potential jobs that were not created, the deceleration in services jobs was more serious than the actual loss in goods production. Some services did suffer considerable declines, notably Transportation and public utilities (.4 million jobs), and Wholesale and Retail trade (.5 million). All three segments of the Finance, insurance and real estate group showed gains (total .2 million).

The Services sub-classification showed interesting divergences. Business services lost .5 million jobs, mainly in personnel supply (temporary help), reflecting the general downturn in business activity. Hotels and other lodging plus Amusement and recreation lost .3 million jobs, also reflecting general weakness. Health services added .7 million jobs, Education added .2 million, Social services .3 million, Engineering and management .3 million, and Government .8 million. Thus, the general picture emerges that activities related to the larger economy lost ground while the sectors that gained are those such as Health, Social services, and Government that have weak relationships to the general economy.

The other side of productivity growth

Productivity growth in recent times has become an icon of economic commentators. The Federal Reserve Bulletin (8/2003) makes observations such as "Core inflation----was held to a low level by slack in resource utilization and continued sizeable advances in labor productivity."----"The aggressive actions taken by firms over the past few years to boost productivity and trim costs have provided a lift to corporate profits and cash flow."----"If not reversed over the longer haul, such low levels of national saving could eventually impinge on the formation of private capital that contributed to the improved productivity performance of the past half-decade."

The presumption has been that increasing productivity growth leads to higher corporate profits, increasing income, more investment, and "low inflation". These are all happy results that ease the job of monetary and political officials so it is not surprising that they prize productivity growth so highly.

But these results do not tell the whole story. The other side of productivity growth - and not usually discussed - is that it eliminates jobs. The extent of this loss can be demonstrated by comparing manufacturing output with manufacturing employment over the past six years as follows:

1997 April 2003 Percent Change
Manufacturing output
100.0 110.1 10.1
Manufacturing jobs
18,675 16,251 -13.0

The net result was that output rose 10.0 percent while employment fell 13.0 percent or 2.4 million jobs. If there had been no productivity growth but the same output growth, there would have been an additional 1.9 million jobs. This exercise is not a condemnation of productivity growth but a reminder that such growth is only half of the story. The workers displaced must be provided with other jobs. As we have seen, few job categories are expanding, and this creates a serious dilemma that policy makers are not addressing in any fundamental way. Policies such as shortening the work day and reducing the labor force through a universal national service program are needed but not even discussed.

The other side of free trade

The report was nothing new: A large California company was moving its software development operation to India. The reason given was that labor costs for U.S. workers were $20 per hour whereas comparable skills were available in India for $5 per hour. We need a more fundamental explanation than this statement.

American workers at this level live in four bedroom homes with air conditioning and three or four baths if they are married, or luxury apartments with spas, swimming pools, and exercise rooms if they are single. They drive luxury automobiles (because their peers expect them to), they eat many of their meals in trendy restaurants, and they expect to spend $10 to $30 to attend concerts or athletic events. Other living costs are equally high. The Asian worker probably lives in a one to three or four room apartment whether married or single. He may walk or bicycle to his place of employment, or he may use minimal public or jitney transportation. He can buy prepared food from street vendors cheaply, or he can buy a variety of foods at open-air markets to prepare at home just as cheaply. For entertainment he may attend a locally-produced movie for minimal expense.

So here we have it. America has a high living standard, high cost economy whereas India has a lower living standard, lower cost economy. America does not provide the infrastructures needed to live on $5 per hour, but India does. The migration of jobs in a free-trade environment such as this is inevitable.

The free-trade proponents have attempted to refute this outcome by saying that only the lower-skilled jobs will migrate while the U.S. will continue to develop more advanced technologies that can only be produced here. In reality, the Asian countries are rapidly moving into the advanced technologies, leaving the U.S. with a clear lead only in military and possibly aerospace technologies.

It is important to note that other proposals for alleviating the consequences of free trade such as comparable environmental standards, comparable worker safety standards, and even comparable wages (a concept that cannot be implemented even within the U.S.) are not ever likely to be effective. They will be subject to endless dispute, lax enforcement, and active subversion. The world has not reached the stage where international standards can be imposed, although steps in that direction could be taken.

Free trade has literally been adopted only in limited areas such as the North American and Euro zones. But job migration has grown even under WTO rules and would undoubtedly increase in a larger free trade environment.

Recent data: April through November 2003

Payroll employment reversed its downtrend in August, and for the April-December period total employment rose 62 thousand jobs. Goods producing industries lost another 177 thousand jobs during this period while services producing industries added 239 thousand. A complete breakdown is not available at this writing, but Retail trade lost 69 thousand jobs, Professional and business services added 235 thousand, Education and health services gained 191 thousand, Leisure and hospitality added 44 thousand, while government lost 58 thousand. The single largest category gain was in Professional and business services, which is closely tied to general business conditions, but the second largest category, Education and health services, has weak ties to the general economy.

The overall employment gain of 62 thousand jobs for a "recovery" period is definitely unimpressive.


Productivity growth and free trade are both structural factors that affect the economy in both expansionary periods and contractionary periods. Both impact the manufacturing sector more than any other. Manufacturing employment fell in both the 1997-2000 period and the 2000-4/2003 period, and this trend will no doubt continue. However, four-fifths of American workers now are employed in services-producing activities. This sector generated huge numbers of jobs in the 1990s, but, as we noted, this growth has sputtered since the turn of the century. Retail trade, for example, lost 30 thousand jobs after adding 1,171 thousand. Yet retail sales grew every year from 1997-4/2003. The industry did create too many outlets and is now contracting. Productivity growth played a key role, as, for example, in self-checkout and computerized inventory control. Wholesale trade employment likewise fell despite continued growth in sales.

Transportation, communication, and public utilities are additional areas that have lost jobs in recent years. These reductions are usually described as "cost-cutting" moves, yet the volume of output has continued to grow - another consequence of higher productivity.

The extraordinary growth of Services employment in the nineties rescued the economy from erosion of employment in Goods production and really went to excess so that we had too many stores, restaurants, motels, bank offices, air routes, etc. Consolidation resulted and is likely to continue. The political and monetary authorities hope to ignite a new boom with easy money and tax cuts, but with capacity utilization at 74.9 percent in September, nearly the lowest in 20 years, this will be difficult to achieve. We confront deep structural problems that require a lot more than ever higher consumption. If weak job growth persists, personal income will stagnate, consumer and investor confidence will fall, and the financial underpinning of the economy will be threatened. The stakes are high and we need to look at new ideas.

International Comparisons
Canada Germany Japan United Kingdom United States
GDP (% chg. one year ago)
0.9 -0.1 -1.9 1.6 0.5
3.9 0.5 2.8 2.2 2.9
    3Q 2003
1.0 -0.2 2.3 2.0 3.5
Industrial Production (1997=100)
111.0 112.8 92.7 101.2 111.2
112.9 111.6 91.5 97.6 110.5
    3Q 2003
117.1 111.7 93.7 99.1 110.8
Retail Sales (volume chg. at annual rate)
5.7 -4.1 -4.4 5.7 6.5
1.4 -3.2 -3.0 6.4 4.9
    3Q 2003
3.1 -3.1 -1.8 3.9 8.3
Consumer prices (1995=100)
169.1 144.8 120.1 203.6 177.1
172.9 146.7 119.0 207.0 179.9
    3Q 2003
177.6 148.2 118.7 212.4 183.7
Unemployment Rates
    2001 @ Dec
8.0 9.5 5.5 5.2 @ 5.8
    2002 @ Dec
7.5 10.1 5.3 5.1 @ 6.0
    3Q 2003
7.7 10.6 5.3 5.0 6.0
Interest Rates (3 months)
3.98 4.26 * --- 4.97 3.40
2.61 3.32 * --- 3.99 1.60
    3Q 2003
2.94 2.38 * --- 3.49 1.04
Stock Indices (ending)
7,688.41 5,160.10 10,542.62 5,217.40 10,021.50
6,614.54 2,892.60 8,578.95 3,940.40 8,341.63
    3Q 2003
7,421.13 3,256.78 10,219.05 4,091.30 9,275.06
Current Acc't Bal's ($bn) latest 12 months
18.9 10.2 91.2 -25.1 -393.7
11.0 50.4 115.0 -13.1 -480.9
    3Q 2003
16.7 56.4 123.3 -36.1 -541.7
Foreign Exchange Rates
1.55 0.90 * 121.57 1.44 126.08
1.57 0.95 * 125.22 1.50 127.19
    3Q 2003
1.43 1.11 * 118.29 1.61 121.05
Currency units per U.S. $
UK pound in U.S. $s
U.S. dollar: index of dollar against major trading partners, January 1997=100
* Euro area (US$/Euro)
Sources: Economist, Economic Indicators,
F.R. Bulletin, Survey of Current Business

On a latest 12 months basis, four of the five economies shown in the table declined, with only the U.S. accelerating. For the third quarter alone, only Britain and the U.S. exceeded 3%. The U.S. rate of 7.2% can only be interpreted as a temporary spurt as a result of deep tax cuts and unprecedented credit ease. Industrial production was lower in September than in January in Canada, Germany, Japan, and the U.S., with a small increase in the U.K. The nine-month average, however, rose from the 2002 level in three of the countries.

Retail sales again showed no gain in Germany and Japan, a decline in the U.K., but gains in Canada and, particularly, the U.S. Consumer prices continued to fall in Japan but increased at a faster rate than in 2002 in the other four countries. Unemployment rates also rose in Canada and Germany while remaining unchanged or slightly lower in the other three countries.

Interest rates continued to fall in response to economic weakness and central bank ease, except for a small rise in Canada. The one sector that reflected undeniable growth was the major stock markets, with the Canadian, Japanese, and American indices near or above the 2001 level. There appears to be a wave of optimism in the markets based on some improved indicators near year-end. How long this will last is one of the interesting things to watch in 2004. Valuations, it must be remembered, are still near record highs.

The current account deficits of Britain and the U.S. again worsened through the third quarter, with the U.S. passing half a trillion dollars or 5.0% of GDP. The U.S. deficit may finally be alarming foreign investors as the dollar fell against all currencies in the table. By late December the Euro was trading at $1.23 versus $.90 in 2001, a 37% change. The Canadian, Japanese and British currencies have also risen versus the U.S. dollar.

Business Activity Indicators - United States
2001 2002 3Q 2003
Industrial Production (1992=100) 111.5 110.9 110.8 *
    Capacity Utilization Rate (% total industry)
77.4 75.6 74.6
Manufacturers' New Orders (billions of $s) 322.9 316.7 324.6 #
New Construction Expenditures (billions of $s) 852.6 860.9 885.0 *
Real Gross Priv. Dom. Invest. (chained[1996]$s) 1,574.6 1,589.6 1,628.5
Business Sales - Mfg. & Trade (billions of $s) 819.4 824.0 850.3 #
Business Inventories (ending) (billions of $s) 1,145.4 1,169.4 1,178.7
Retail Sales (billions of $s) 262.8 270.5 282.6 #
Retail Inventories (ending) (billions of $s) 405.6 436.3 446.4
Per Cap. Personal Consump. Expend.'s (chained [1996] $s) 22,390 22,877 23,279 *
Nonagricultural Employment (millions) 131.8 130.4 130.0 #
    Goods Prod. (millions)
23.9 22.6 22.1 #
    Services Prod. (millions)
108.0 107.8 107.9 #
* Annual Rate
# Monthly average
Source: Economic Indicators

Real GDP rose 7.2 percent in the third quarter after rising 3.3 percent in the second and 1.4 in the first. The largest contributors to the third quarter increase were personal consumption expenditures (4.7 percent) and gross private domestic investment (1.4 percent).

Industrial production was lowest in May and June with an index of 100.0 and rose to 111.8 by October; the strongest sector was durable goods. Capacity utilization at 74.9 percent was still lower than in January.

Manufacturers' new orders began to pick up around June, also led by durable goods. New construction continued its historic rise, spurred by record low interest rates, through October. The rise is primarily due to new private home construction, with units completed reaching 1.7 million at an annual rate in October. Vacancy rates for rental housing have been rising and reached 9.9 percent in September.

Private investment spurted in the third quarter. Part of this was due to the strong housing construction, but part of it was also due to increased spending on equipment and software by business.

After weakness in the spring, business sales began to pick up in June, and by October were at new highs. Inventories were below their high and did not rise after April. Retail sales grew moderately from June through October. Retail inventories were at new high levels all through 2003.

Per capita consumption expenditures actually increased every quarter during the economic downturn despite falling employment. This trend accelerated during the second and third quarters of 2003 thanks, no doubt, to tax and credit stimulants.

We have already commented on recent employment trends. Total employment in December was lower than in January. Goods producing employment continued to fall in almost every month of 2003. Services employment grew weakly beginning in June, much as the overall economy did.

Financial Indicators - United States
2001 2002 3Q 2003
National Income (billions of $s) 8,122.0 8,340.0 8,636.5 *
    Percent change
1.7 2.7 3.6
Per Cap. Disp. Personal Income (chained [1996]$s) 23,692 24,463 24,779
Avg. Real Gross Wkly Earnings (1982=100) 275.38 278.91 279.18
Gross Saving " 1,658.1 1,539.3 1,431.9 *
    Personal "
127.2 183.2 176.0
    Business "
1,463.0 1,599.5 1,684.8
    Government "
67.9 -243.4 -428.9
Commodity Price Index (1995=100) 65.4 74.7 81.7
Producer Price Index (1982=100) 140.7 138.9 142.8
Corp. Profits (with i.v.a.&c.c.a.) (billions of $s) 731.6 787.4 605.4
Interest Rates - 10 year Treas. 5.02 4.61 3.92
Money Supply - M3 (ending) " 8,006.2 8,525.8 8,943.0
    Percent change
12.8 6.5 4.9
Federal Gov't. Current Surplus or Deficit (NIPA) " 72.0 -202.1 -373.9
Commercial Bank Credit (ending) " 5,432.9 5,890.9 6,192.1
Consumer Credit (ending) " 1,817.2 1,895.4 1,976.3
Credit Market Debt (ending) " 29,325.1 31,617.3 33,617.3
    Household Sector "
7,717.7 8,488.7 9,147.4
    Total bankruptcy filings (thousands)
1,491.7 1,576.1 1,662.0
* Annual rate Sources: Economist, Economic Indicators, F.R. Bulletin, F.R. Flow of Funds, Administrative Office of the U.S. Courts

National income growth accelerated in the first three quarters of 2003 to an annual rate of 3.6 percent; the strongest component was corporate profits which grew 15.0 percent. Real per capita income rose 1.3 percent, and real gross weekly earnings increased $.27. These increases "mainly reflected a $100.0 billion drop in personal tax and non tax payments. In turn, the drop in taxes reflected the lower withholding rates and the advance payments of child tax credits provided by the Jobs and Growth Tax Relief Reconciliation Act of 2003" (Survey of Current Business, November 2003).

The savings and investment data reported by the Federal Reserve are revised considerably from previous data. The major changes are a downward revision to Government saving and an upward revision to Business saving. The third quarter estimate (a.r.) for government saving is $486.3 billion, near the NIPA estimate (a.r.) for the Federal current surplus or deficit of $-451.3 billion. One of the major constituents of Business saving is the capital consumption adjustment, which has been rising since passage of the Jobs and Growth Act of 2003. This act allows corporations to write off 50 percent of property acquired after May 5, 2003, thus reducing their tax liability. The capital consumption adjustment has more than quadrupled since 2001, from $64.5 billion to $260.1 billion in the third quarter. The rise in business saving and the decline in government saving are to a considerable extent simply two sides of the same thing.

The commodity price index on September 30 was 9.8 percent higher than a year earlier with strong gains of 22.2 percent in metals and non food agricultural products. This strength apparently is due to strong demand from China and other Asian countries. Producer prices are also significantly higher after falling in 2002. Consumer foods and non durables show gains whereas capital equipment prices were little changed.

The sharp increase in corporate profits is partly a product of tax breaks in the Jobs and Growth Act of 2003. In the third quarter, for example, profits without the capital consumption adjustment rose $74.6 billion, but after the c.c.a. they rose $105.5 billion.

After touching a low of 3.33 percent in June, the ten year Treasury yield has settled a little above 4.0 percent. These low yields underscore the continuing excess of investment funds seeking profitable outlets. Other signs include the drastic narrowing of spreads between junk bonds and Treasuries and the rise in stock prices despite high price-earnings ratios. The M-3 money supply has been rising near the 2003 pace but, uncharacteristically, fell in September and October.

The current deficit of the Federal government has risen in each quarter of 2003, reaching $-451.3 billion (a.r.) in the third quarter; this equaled 4.1 percent of GDP.

Total bank credit did not grow from August through October. Commercial and industrial loans were lower in October than in January, but real estate credit continued to grow. Revised consumer credit data show that, after slowing in 2003, consumer borrowing accelerated in 2003. This constituted another stimulant to personal consumption.

Non financial credit market debt grew 6.1 percent from December 2002 through September 2003 while financial debt grew 7.5 percent. Household debt has grown 10 percent or more in each of the last four quarters. The growth in financial and household debt is largely due to home mortgages.

Bankruptcies continue to rise. In the year ended September 30, total filings were up 7.4 percent from the corresponding period in 2002. Non-business or personal bankruptcies now account for 97.8 percent of all bankruptcies filed in federal courts.

Selected International Transactions - United States
2001 2002 3Q 2003
Trade Balance on Goods & Services ($bns) -357.8 -418.0 -365.0
    Goods "
-427.2 -482.9 -407.1
    Services "
69.4 64.8 42.1
U.S. Owned Assets Abroad, net [inc/capital outflow(-)] " -349.9 -179.0 -226.5
Foreign Owned Assets in US, net [inc/capital inflow(+)] " 765.5 707.0 636.3
    Net change in US Int'l Inv. Pos'n "
415.6 528.0 409.8
Net change in Foreign Owned U.S Securities
    Treasury Securities & Cy Flows "
27.1 160.9 202.5
    Other U.S. Securities "
433.3 325.5 170.8
Sources: Economic Indicators, Survey of Current Business

The deficit on goods and services has grown consistently over the past three years. From 2001-2 it increased $60.2 bn, and from 2002-3 it is on track to increase $68.6 bn. It rose in each quarter of 2003. The deficit on goods mirrored this performance while the surplus on services, which rose in the third quarter, is likely to be lower for the year.

Goods exports through the first three quarters of 2003 were little changed from 2002, but goods imports are likely to be some $70 bn higher. Services exports for the same period are likely to grow a little but not as much as imports.

Financial flows into the U.S. and from the U.S. abroad picked up considerably during the first three quarters. With foreign inflows exceeding U.S. outflows, the net position is likely to deteriorate about $25 bn, considerably less than in 2002.

In 2002, foreigners increased their holdings of Treasury securities while decreasing their holdings of stocks and other bonds. This trend accentuated in 2003, both for official purchases and private purchases. Presumably this reflects doubts about rising equity prices and a preference for maximum safety.

Copyright © Andrew Caughey, 2004

The Pulse of Capitalism is published quarterly. Comments may be sent to Pulse Publication, P.O. Box 140, Gibsonia, PA 15044. Telephone: (724) 443-2396
Material may be reprinted with acknowledgement of the source. Economic statistics are revised routinely and may, therefore, differ from one report to another.

Published January 2004

[Home][About the Pulse of Capitalism][Subscribe][Copyright Notice][The Commonwealth Institute]

The Pulse of Capitalism web publication by The Commonwealth Institute
Site designed, edited and maintained by IRN Internet Services