The Jobless Recovery Housing, interest rates, inflation--almost everything is going right for this economy. Everything, that is, except job creation
By Lou Dobbs

(MONEY Magazine) – The economy grew by more than 3% in 2003, and third-quarter growth was the highest in nearly two decades. Inflation is low. Home ownership is at record levels. And the stock market is up nearly 50% from its October 2002 low. It may not be a boom, but the economy is certainly strong.

Historically, at this stage of the recovery, we should be adding as many as 300,000 jobs a month. Instead, we've been averaging less than 100,000 a month. So why isn't this economy creating jobs? I talked with three of Wall Street's top economists to get answers to that question.

How many jobs?

John Ryding, chief market economist at Bear Stearns, is bullish on the economy. Ryding expects gross domestic product (GDP) growth of 4.5% to 5% this year.

Ethan Harris, chief U.S. economist with Lehman Brothers, says we can expect GDP growth of about 4% to 4.5% with only moderate job growth. "There's a healing process in the economy," he says. "But it's not a very powerful healing process."

Stephen Roach, chief economist at Morgan Stanley, is the least bullish of the group. "I think growth will be pretty solid in the first half--around 4%--but then fade in the second half," he says. For the second half, Roach expects growth to drop to less than 2%.

And what about job creation? "It's obviously a jobless recovery," Roach says. "Whether or not that qualifies as a sustainable recovery remains to be seen. But it's certainly, at best, a recovery with a huge asterisk."

Ryding attributes the joblessness of this recovery to productivity gains. "I think the main reason is that the economy has just registered phenomenal productivity growth, which was close to 5.5% in 2003." But Ryding also says that productivity did show signs of slowing at the end of last year. He expects the economy to add 2.5 million jobs this year. That's almost as optimistic as the Bush administration's original projection (since retracted) of 2.6 million jobs.

Harris, on the other hand, says job creation hasn't recovered because "the stimulus that the Bush package offered doesn't have a direct impact on the job market." And, he asserts, "the governance scandals, stock market crash, the weak economy, all sent the message to corporate America to get much more conservative in the way they manage their businesses."

Roach cites three factors behind the lagging labor market. One is "the explosion of outsourcing." The second is the Internet, which makes outsourcing even easier. And the third is the fact that companies find it so hard to raise prices, which forces them "to be unrelenting in their pursuit of cost control."

Ryding expects that we will see an average of roughly 200,000 jobs a month created for the rest of this year, while Harris pegs the figure at 150,000 to 200,000. Roach is more cautious. "We're running about 83,000 new jobs a month in the private economy, which is less than half of what we normally see at this stage in a business cycle," he says. "We may get a little bit better, but not a lot."

Will the recovery last?

Neither Ryding nor Harris is concerned that the overall recovery will stall if the labor market doesn't pick up. But Roach believes the recovery is "absolutely" vulnerable. The reason, he says, is that "income generation, which is driven by the combination of hiring and increases in real wages, is lagging dramatically." And he says that consumers have been able to keep spending because of "tax cuts, debt, drawing down savings and extracting purchasing power from overvalued assets like homes." But he warns that relying on those factors has "put the U.S. economy on an increasingly precarious footing, in my view."

The outsourcing debate

The experts also differ on the effects of shifting jobs abroad. Ryding contends, "I believe it helps the U.S. economy because it results in higher productivity growth, more profitable companies, which in turn fuels growth within the U.S." But he also acknowledges that "this trend [weighs] disproportionately on manufacturing."

Harris claims that the transfer of jobs overseas is a relatively small issue. "We have to keep in mind the sheer scale of the U.S. labor market," he says. "In a healthy environment, the U.S. adds about 150,000 jobs a month, and if you add up all the anecdotal reports of outsourcing just isn't big enough to have an important impact on the outlook."

Roach is the only one of the three who sees the migration of U.S. jobs overseas as a major problem. "I think that jobs right now are about 8 million workers below where they should be," he says. "It's hard to estimate how much of that 8 million is traceable to outsourcing or offshoring, but I'd say it's a significant number. It could be as much as 25% to 33% of that total. What you are a significant transfer of jobs from the high-wage, rich countries like the United States to low-wage, developing countries like China and India."

The political impact

Roach notes that job-related issues have often had a big effect on the markets and politics. What's different this time is that the jobs question is "increasingly a white-collar phenomenon," he says. "This is a new, rather unique development, and that's why its political impacts are so acute."

The Bush administration could certainly feel the impact acutely if job creation doesn't pick up. As the Democratic presidential nominees are making clear, jobs will be a defining issue in this year's election.