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Economic Forecasts

At Last: A Big Gain in Jobs

Strong private sector gains signal a turn for the better.

Businesses hired a burst of workers in October to handle new orders, especially in the service sector. Net job growth of 151,000 last month shows an economy finally shifting from recovery to expansion. Revisions to job losses in August and September provide more good news: The Labor Department now puts the drop at 42,000 instead of the previously reported 152,000.

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Certainly, there's still a long way to go. Heidi Shierholz, an economist with the Economic Policy Institute think tank, notes that as welcome as October's job growth is, at that pace it would take 20 years to lower the unemployment rate from the current 9.6% to 5%, where it stood at the start of the last recession. Economic growth -- at 2% in the third quarter, a bit better than the 1.7% pace in the second quarter -- isn't enough to make a dent in the unemployment rate.

About 1 million jobs will be added this year, and about 1.5 million in 2011. The business cycle has passed the familiar phase where employers can substitute productivity gains for hiring workers. Labor productivity advanced an impressive 6.3% for the year ending with the first quarter. Over time, however, the ability to eke more out of existing labor resources wanes and labor productivity slows. In fact, the economy actually experienced a decline in labor productivity during the second quarter. Output per hour of input fell at a 1.8% annual pace. The third quarter showed a modest increase of 1.9%, and future growth in output will require employers to add workers.

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But before adding many full-time permanent workers to payrolls, employers want to see evidence that the recovery is on solid footing. A midyear economic soft patch raised doubts about that, but just earlier this week, reports from purchasing managers in both manufacturing and services showed sustained growth in new orders.

Health care once again added jobs -- 24,000 in all. But other sectors chimed in, too, including retail stores, restaurants and temporary help. Even construction posted a small increase.

October marks the ninth straight month of gains in private sector jobs. At the same time, however, fiscal stress is starting to take a toll on state and local governments. They cut 7,000 jobs in October after cutting 73,000 in September. Shrinking tax revenue at the state and local levels likely will keep layoffs rising for several months. In addition, the Labor Department report indicates other areas of weakness. Manufacturing shed 7,000 jobs. And a broader measure of the unemployed that includes part-timers unable to find full-time work remained very high, at 17%.

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