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HOW WILL 2003
BE DIFFERENT FROM 2002
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BY BRYAN BEZOLD
RCGA DIRECTOR OF RESEARCH AND CHIEF ECONOMIST
The US and St. Louis economies both kept sliding in 2002. At the
beginning of 2002, most economists (including this author) expected
a return to healthy growth by the end of the year. That didn’t happen,
and now, at the outset of 2003, most economists again expect a pickup
in the second half of this year. It’s reasonable to ask, though,
why the same prediction that was wrong a year ago would be right
this year.
There are a few things that should make 2003 a little better than
2002. First of all, the situation in Iraq has been resolved. Uncertainty
over that situation is thought to have kept businesses from making
big decisions about investments in either new capital, goods or
people. Energy prices, especially oil, are low right now. Prices
of commodities and some manufactured goods are so low that the Federal
Reserve has recently indicated that it is more concerned about deflation
than inflation. And for the first two months (the only two available
as St. Louis Commerce Magazine went to press) of 2003, total
employment in St. Louis was above year- ago levels. Two months does
not necessarily make a trend, but prior to January and February
there had not been two consecutive months with employment above
year-ago levels since November and December of 2000.
Thus, there are a few differences between this year and last year,
and some other data suggests that a more robust recovery may be
in the offing. Output and employment figures for 2002 show that
manufacturers spent the year finding ways to make more with less.
Producing more output with the same or less labor is a good thing—usually
we call it productivity growth. Productivity growth is what allows
real wages, wages adjusted for cost of living increases, to grow.
But in the short run, it can depress hiring. That appears to be
what happened in the manufacturing sector last year.
The manufacturing sector was hit first and hardest by the current
recession. During the last year, however, a pattern emerged that
bodes well for the future. When we compare measures of manufacturing
output, in this case the Institute of Supply Managers’ (ISM) Manufacturing
Index for St. Louis, with employment measures, we see a dichotomy.
On the ISM scale a score above 50 means manufacturing output is
expanding. By that measure, the manufacturing sector in St. Louis
grew during 11 of the 12 months in 2002. Over that same period,
however, manufacturing employment in St. Louis declined slightly.
So during 2002, manufacturers in St. Louis became more productive,
by increasing their production without increasing their employment.
This kind of productivity growth is a mixed bag for a region’s economy.
Obviously we’d like to see both output and employment growing, with
productivity growth that allows output to grow at a faster rate
than employment. But last year, manufacturers were reluctant to
add workers. That’s understandable, given the myriad of uncertainties
they faced.
So what suggests that manufacturers will increase both employment
and output in 2003? The average weekly hours worked in manufacturing
may provide an answer. The average workweek in manufacturing during
2002 was 40.8 hours. At the end of the year, though, that started
to change. In December, the week extended to 42.2 hours, and for
January and February the average workweek moved above 43 hours.
Typically, we would expect that firms would try to increase the
hours that existing employees work before they commit to adding
new workers. So an increase in the hours of current employees should
precede an increase in the total number of workers.
We’ve seen that manufacturers appear to have found ways to increase
their productivity during 2002, and that the average workweek in
the manufacturing sector has been creeping upward in the last few
months. Combined, those two trends suggest that our local economy
may be climbing out of this recession. 2003 shouldn’t be a rerun
of 2002. |
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