January 23, 2004, 8:53 a.m.
Establishment Point of View
Think record jobs and GDP, not a jobless recovery.

Data is showing strong, sustainable growth for the U.S. in 2004, which has continued positive implications for U.S. profits and equities. In both nominal and real terms, U.S. gross domestic product has hit a new record in each quarter of 2002 and 2003, reaching over $11 trillion in current dollars. And in the fourth quarter of 2003, the economy grew fast — probably well over 5 percent — defying the bearish expectations about the temporary nature of the U.S. expansion.

But the detractors still ask, What about the jobs?

Well, there are two job surveys produced by the Department of Labor — the household survey and the establishment (or payroll) survey. Each has a different story to tell.

The government's survey of household employment showed an all-time record 136.2 million non-agricultural workers in December, which is up over 1.5 million in 2003. More, unemployment claims fell to a 347,500 four-week average through January 10 — a level consistent with fast job growth. This is the same picture shown by the rapid decline in the unemployment rate to 5.7 percent.

But the missing part of today's strong economic picture is a rise in the establishment survey of employment. According to this survey, the number of jobs in U.S. non-farm establishments fell 74,000 in 2003.

There are several explanations for this weakness.

Employment in established businesses rose to a very high level in the late 1990s, in part at the expense of self-employment. Some part of the current weakness in establishment jobs — and the strength in the household survey — is a reversion to normal after the boom of the late 1990s.

The establishment survey is also routinely revised upward at turning points in the economy. Looking back to the 1992-93 period of weak growth in the establishment survey, payrolls were upwardly revised by 1.88 million jobs in the ensuing years, validating the household-survey view of the labor market.

Establishment employment is also related to changes in inventory. Inventories fell even in last year's third quarter — when GDP rose 8.2 percent — and November data showed inventory-to-sales ratios still at record lows. Establishments have been particularly risk-averse on hiring due to deflation and 9/11.

Skewed seasonal factors (notably for retail employment) may also be playing a role. The establishment survey underperformed the consensus for December 2002 (released in January 2003) by 121,000, but outperformed the consensus by 75,000 for January 2003 (released in February 2003).

With the above points in mind, it's reasonable to say that employment in the establishment survey will grow strongly in 2004 as inventories rebuild, risk-aversion at big companies finally abates, and the bulge in establishment jobs finishes reverting to normal.

Think record jobs and GDP, not a jobless recovery.

— David Malpass is the chief global economist for Bear Stearns.

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