Another "jobless recovery"? (Briefing: The Economy).

AS THE ECONOMIC RECOVERY finally hits its stride, attention has shifted to the pace of employment growth this year. So far, GDP growth has come back surprisingly strong, but employment gains have been minuscule. Most economists expect the unemployment rate to hover between 5.5% and 6.0% for

The last recession ended in March 1991, but 211,000 jobs were lost over the following 12 months, creating a so-called "jobless recovery." In the early 1990s, the credit crunch in real estate decimated construction jobs, and the restructuring mania at U.S. corporations shrank manufacturing and services payrolls. The unemployment rate kept rising until June 1992, 15 months after the end of the recession.

Are we going to see the same scenario unfold again? Probably not. Nevertheless, there are reasons to believe that employment growth will face strong headwinds. To begin with, the labor market always lags behind the business cycle. It's normal for job creation to remain sluggish as the economic recovery surges ahead. Employers won't start rehiring full-time workers until they are convinced that the rebound is real. In the meantime, employers often make do by having their existing employees work more hours or by relying on temporary help. Indeed, manufacturing overtime hours increased in March, as did employment through temporary placement agencies.

The main reason for slower job growth over the next few quarters is ongoing productivity improvement. Throughout the current slowdown, U.S. productivity gains have been exceptionally strong. In the long run, of course, higher productivity is beneficial. Economic theories have not yet fully explained how the unemployment rate is affected by a sustained rise or fall in the rate of productivity growth, but at least in the short run, rising productivity allows businesses to boost output with fewer employees.

Before the unemployment rate can start to decline, GDP growth must be faster than the combined growth rate of productivity and the work force. It's a safe bet to assume that productivity growth will be around 2% this year. The U.S. labor force for years has been growing about 1% annually. That means the unemployment rate won't drop unless the economy expands faster than 3%. As we are in a U-shaped recovery, the rate of GDP growth is unlikely to be much higher than that.

Prevalent profit worries among CEOs are another factor that will curb job growth. In previous business cycles, recoveries brought 20-30% jumps in corporate profit. The mildness of the latest slowdown moderates profit growth. Demand will grow only incrementally, and most producers lack pricing power. At the same time, higher energy prices and health care costs take bites off corporate profit. Consequently, employers will try to delay hiring as long as possible to control expenses and wring out more profit.

One implication of weak employment conditions is that the Fed is not likely to raise short-term rates aggressively.

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