A Bright Forecast for Employment and the Economy
Recent reports suggest that the U.S. economic recovery may be losing steam. Not to worry, says Ian Shepherdson, a highly respected economist with High Frequency Economics, an investment and economic forecasting firm. Shepherdson thinks the U.S. will produce an avalanche of new jobs this year, leading to a pickup in economic growth and a rising stock market.
His case is a little wonky, but it's well worth understanding. It starts with three key economic numbers that are pointing in different directions, prompting head scratching among economists, policymakers and investment strategists alike.
The numbers: gross domestic product (GDP); job growth as measured by non-farm payrolls; and job growth as measured by a separate government survey of households.
As Federal Reserve Chairman Ben Bernanke says, non-farm payrolls in recent months have grown at a far faster rate than indicated by forecasts for GDP growth. An economy growing at roughly 2.5% annually shouldn't be creating anywhere near 200,000-plus new jobs per month.
Consequently, Bernanke and many other economists were not surprised to see the growth in non-farm payrolls fall to a relatively puny 120,000 in March -- a pace they say is likely to rise only gradually in the months ahead. Other recent indicators, they say, also point to a slowing in the recovery.
But Shepherdson isn't worried. First things first: Shepherdson is no flake. He's a well-regarded, mainstream economist. He's no Pollyanna, either. Indeed, he was one of the first economists to argue that a bursting of the housing bubble would drive the U.S. into a deep recession. He began making that case in the fall of 2005.
300,000 New Jobs Monthly?
By this summer, Shepherdson predicts, the U.S. economy will begin creating 300,000-plus new non-farm payroll jobs monthly. He forecasts that the unemployment rate will fall to 7.5% by year's end.
Why so many new jobs? Shepherdson says that as the economy hits full stride during recoveries, the unemployment rate tends to fall much faster than is implied by its usual relationship with the rate of GDP growth. This phenomenon has occurred in six of the eight economic recoveries since 1960. This recovery, he argues, is no different. (You really don't want to know how economists correlate the relationship between job growth and GDP growth.)
But he has another point. The government measures the health of the job market using two separate surveys. One canvasses businesses, asking them how many workers they are hiring and firing every month. This survey produces the headline non-farm job number, the one that showed just 120,000 jobs added in March.
The other government survey interviews 60,000 scientifically selected households monthly, asking people their current employment status. This survey yields the unemployment rate, which fell to 8.2% last month -- although part of that improvement was due to some job seekers giving up looking for work.
The household survey shows that 2.1 million new jobs were added in the seven months through March -- or 300,000 jobs per month. By contrast, the business survey finds that only 1.3 million jobs were added over the same span. "The real mystery is why household employment has been so much stronger than the payroll survey," Shepherdson said in a recent note to clients.
During economic recoveries, he maintains, the household survey is far more reliable than the business survey. Why? When the economy is recovering, a lot of small businesses get launched. Many of the jobs they create aren't captured by the business survey simply because these concerns are too new. Shepherdson points to a pickup in bank lending as evidence that small businesses are starting up and adding more jobs than the business survey reflects.
GDP, he thinks, will grow a healthy 3% this year. (See Kiplinger's GDP Forecast.) And he predicts that the Dow Jones industrial average will rise to 13,750 by year's end (the Dow closed at 12,927 on April 23).
Shepherdson, who correctly stayed upbeat on the economy during last summer's squall, thinks the Federal Reserve will have to begin tightening monetary policy next year, sooner than it had planned. Meanwhile, he expects investors to push down bond prices and push up bond yields as they see the economy strengthen.
Of course, no economist bats a thousand. Shepherdson could well be wrong this time. But it's worth considering the possibility that he's right. I think he just might be.
Steven T. Goldberg is an investment adviser in the Washington, D.C. area.
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