Sour Notes in the March Employment Report

The past six months have not been a particularly rosy time for the U.S. economy. High interest rates, high energy prices and a reining in of runaway expectations in financial markets have all contributed to a dramatic slowdown in economic activity that began in the late summer of 2000. In the short space of twelve months, economic policymakers have gone from worrying about the economy growing too fast, to whether it will grow at all.

In all likelihood, reports will show that the U.S. economy contracted in the first quarter of 2001 when they are released later this month. That forecast is based on the unwelcome, yet unsurprising news that the great U.S. job creation engine sputtered to a halt in March. In the wake of reports already in hand that show weak business spending and continued declines in industrial output, there is ample evidence now that our slowdown has turned into a downturn.

The Bureau of Labor Statistics employment report, which showed a net reduction in employees on business payrolls of 86,000, was not the first time that the economy failed to add to the job base. But earlier dips could be explained by one-time events unrelated to the health of the economy, such as layoffs of temporary Census workers or strikes. In the years since 1992, you can count on the fingers of one hand the number of occasions when the economy failed to add jobs.

Numerically speaking, the decline in total employment in March could be attributed to the continued job losses in manufacturing industry employers, whose payrolls were pared by 81,000 jobs in the month. Factory jobs now number about a quarter of a million fewer today than they did in December. The recent month's job figures portray a marked acceleration in the steady downward trend in manufacturing employment that began in 1998.

But from a broader point of view, the reason why the U.S. economy failed to produce positive growth in employment in March was because the non-manufacturing side of the economy couldn't pick up the slack. The durability of job growth in retail trade, financial, and service industry employers in recent months stood in contrast to widely circulated anecdotal reports of job cutbacks by high profile employers, and gave some hope that the overall economy might bottom out without growth going negative.

But the March employment report pours cold water on those arguments. Only the comparatively small financial sector of the economy, propelled by low mortgage rates and respectable building activity, has escaped the economic malaise. The formerly high-flying services industries saw payrolls grow by a scant 11,000 jobs, thanks in part to a cratering of demand for temporary help services. And retail trade employers cut back on payrolls to the tune of 46,000 jobs, reflecting weak sales across a wide spectrum of goods and services.

The question of whether or not the U.S. economy is in recession will be answered by academic economists in the coming years. Truth be told, there's not much difference between an economy that is limping along with negligible growth and one that is slightly contracting. The more relevant issue, which has yet to be resolved, is when, and how quickly, will the economy recover?