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Dear Clients,

Attached you will find our latest report, “Where Will US Employment Growth Come From?” This report analyzes which sectors have seen dramatic changes in job growth in recent decades and considers which sectors are poised see employment growth in the years ahead. Key conclusions to the report include:
• The tradable goods sector experienced severe job losses in the most recent decade
• Business services and health care will drive employment gains this decade
• Manufacturing employment will be stronger than anticipated as a result of improved productivity in the US and rising wages in China

As always, we welcome any questions or comments.

Best regards,
David Hale
Chairman

David Hale Global Economics, Inc.

847-386-6009 (tel)
847-386-6011 (fax)
davidhale@davidhaleweb.com

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THE 2000s SAW STAGNATING PRIVATE EMPLOYMENT GROWTH

One of the great questions now looming over the US economy is how it will produce new jobs to compensate for the 8.5 million lost in the 2007-09 recession. The economy has so far regained over three million of those lost jobs, but at the current rate of job creation it will take nearly three years to close the gap.

During the decade 2000-09, private sector employment fell by 3%. Manufacturing employment declined by 33%. Construction employment declined 15%. The retail sector lost 5% of its lobs. Wholesale trade lost 8% of its jobs. The information service sector lost 22% of its jobs. The big gainers were health services (27%), education (32%), leisure and hospitality (11%), local government (12%), state government (8%), and mining and logging (12%).

Michael Spence and Sandile Hlatshwayo wrote an article for the Council on Foreign Relations last year which examined job creation during the past twenty years. They found that non-tradable sectors accounted for 97.7% of the 27.3 million new jobs created during that period. They found that 40% of new jobs came from health care and government. They also reported large job gains in retailing and business services. The tradable sector produced jobs in high-end services, such as management, computer design, finance, and insurance. The manufacturing sector lost millions of jobs as firms outsourced lower value-added jobs. The value-added of the jobs which remained increased by 44% compared to 21% for the economy as a whole. They warn that unemployment could remain high because domestic demand will remain weak and pressure to reduce the government's fiscal deficit will prevent job creation in the government sector. They believe the government will need new policies for investment in human capital, technology, and infra-structure to revitalize the tradable goods sector.

WHAT SECTORS WILL DRIVE EMPLOYMENT GROWTH THIS DECADE?

The Bureau of Labor Statistics has produced a new report which examines the employment outlook in 2020. The US economy lost 1.989 million non-agricultural wage and salary jobs during the decade 2000-10 because of the severe recession during 2007-09. The BLS projects it could create 19.7 million jobs during the decade 2010-20 if there are no new business cycle downturns. The BLS projects there will be 5.6 million jobs from the health care sector, 3.8 million from business services, 1.8 million from retailing, 1.6 million from state and local government, and 780,000 from financial services. It expects the federal government to lose 372,000 jobs as the post office sheds 182,000 jobs. It is also pessimistic about manufacturing and expects the sector to lose 73,000 jobs. The one goods producing sector about which BLS is optimistic is construction. It expects the sector to create over 1.8 million jobs as the homebuilding industry recovers.

The projected job gains in the health care sector are very diverse. The report projects 1.4 million new jobs in the offices of medical practitioners, 878,000 in hospitals, 872,000 in home health care services, and 822,000 in nursing and residential care facilities.

The report is also positive about local government job creation. It projects 741,000 new jobs in local government education. Since 2008, the state and local government sector has shed nearly 650,000 because of its need to reduce fiscal deficits. The BLS is assuming that when state tax receipts return to their pre-recession levels, they will resume hiring. Such hiring could commence as early as 2013 if tax receipts continue to recover.

The job gains that the BLS projects are a natural extrapolation of recent trends. The population is aging, so it projects more spending on health care. The manufacturing sector has been losing jobs since the 1970s, so it expects the trend to continue. The construction sector lost two million jobs during the recent recession, so it should regain most of those jobs when homebuilding recovers. Business services have been a high growth sector since the 1940s, so a normal business cycle should produce many new jobs. The same is true of leisure and hospitality, financial services, and retailing.

WHY THE MANUFACTURING SECTOR WILL BE STRONGER-THAN-EXPECTED

The BLS is probably too conservative about the manufacturing sector. The US achieved large productivity gains during the recent recession while restraining wages. It has become highly competitive after a long period of dollar devaluation. Exports accounted for nearly half the economy's growth since 2009 and helped to create over 450,000 new manufacturing jobs. The Boston Consulting Group is forecasting that the enhanced competitive position of US industry will again make manufacturing a growth sector. They note that US wages were 4.6 times Chinese wages in 2005, adjusted for productivity, and will be only 2.3 times as high in 2015. General Electric has announced that it will create 9,000 new manufacturing jobs in the US after a long period of outsourcing. Only 43% of GE employees are currently in the US.

The outlook for health care spending will depend heavily upon what happens with fiscal policy. Rep. Paul Ryan (R-WI) has persuaded the Republican House caucus to approve a budget which would privatize Medicare. If Medicare is privatized, there will be tremendous pressure to reduce costs which could retard job creation. There is no way to predict what will happen until we see the outcome of the 2012 election, but the large federal budget deficit will put pressure on any new administration to restrain health care spending.

The BLS report about employment trends assumes no business cycle. As the Federal Reserve is committed to holding interest rates at a low level until 2014, there is little risk of a new recession during the next two or three years, but if inflation starts to accelerate after 2014, the Fed could impose more restrictive policies and create the risk of a cyclical downturn in 2016 or 2017. The pressure to reduce the government deficit will also increase the risk of fiscal drag over the next five years. The Congress will try to avoid creating a recession, but fiscal policy could reduce domestic demand by 0.5-1.0% per annum during the next few years.

Despite all the caveats about federal fiscal policy, the health care sector will be the economy's leading job creator during the next ten years. It will be followed by business services, construction, retailing, local governments, and leisure and hospitality. The great surprise could be a decade of positive growth for manufacturing because of the enhanced competitive position of US industry, the cheap dollar, and rapid growth in the emerging market countries. The tradable goods sector has been shedding jobs since the 1970s, but it has great potential to be a job creator during the current decade.

©2012 David Hale Global Economics, Inc.

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