The job market will rebound a lot sooner than you expect.

Commentary about business and finance.
Nov. 14 2009 7:52 AM

Coming Soon: Jobs!

Why employment will rebound sooner than you think.

The jobs are coming. Click image to expand.
The jobs are coming

Like some gothic serial novelist, the Bureau of Labor Statistics delivers another chapter of the same grim tale on the first Friday of every month. In October, the unemployment rate spiked to 10.2 percent, the highest since April 1983. Since December 2007, payroll employment has fallen by 7.3 million jobs. The ratio of unemployed workers to job openings is 6.1 to 1; in December 2007, it was 1.7 to 1.

But some recent data points, and an understanding of the behavior of companies at different phases of the business cycle, suggest we'll have job creation sooner rather than later.

Before things get better, they have to get worse more slowly. That's already happening. After the credit meltdown, companies prepared for Armageddon by hacking jobs indiscriminately. Between November 2008 and April 2009, employers reduced payrolls by 645,000 per month. But in October, BLS reported that the U.S. economy lost 190,000 jobs, and it revised down the job loss figures for August and September. First-time unemployment claims are falling.

Other data give more reason to hope. In the third quarter, productivity—econospeak for companies doing more work with the same amount of labor—rose at a 9.5 percent annual rate. We've just witnessed the fastest two-quarter productivity surge since the first year of the Kennedy administration. Economists can read these omens the way Roman priests read chicken entrails. And here's one of their explanations: Just as investors and businesspeople don't believe things could ever go wrong at the peak of the boom, they have difficulty imagining things can get better at the trough of the bust. And so they respond to rising demand not by hiring new employees but by coaxing existing employees to work harder. But just as hamsters can run only so fast on their treadmills, there are limits to productivity growth. "If you look at economies over many centuries, you can't grow productivity for 7 or 9 percent for more than two or three quarters," said Lakshman Achuthan, managing director at New York-based Economic Cycle Research Institute, whose leading employment indicators are looking up. "At a certain point, people will start to collapse at work." Should the economy expand in the fourth quarter at the same 3.5 percent annual rate it did in the third quarter—as it shows every sign of doing—companies won't have any choice but to hire, says Michael Darda, chief economist at MKM Partners. "There's an outside chance we could see job growth by the end of the year."

In October, even as companies were cutting jobs, John Deere and Caterpillar recalled some laid-off factory workers and City Center, the mammoth casino-hotel-condo complex in Las Vegas, began hiring 12,000 workers for its December opening. According to Challenger, Gray & Christmas, in October companies announced they plan to hire 57,520 workers, the highest number since July 2007—and nearly eight times the total from October 2008.

Layoffs and restructurings are continuing at blue-chip companies: Time Inc., Johnson & Johnson, and Microsoft have announced workforce reductions in recent weeks. But we shouldn't expect job growth to come from the Fortune 500. According to a new study from the Kauffman Foundation, companies less than five years old created nearly two-thirds of net new jobs in 2007. Growth will come from the two guys subletting an office suite in Palo Alto who may be creating the next Google, or from the hole-in-the-wall Mexican spot that could be the next Chipotle.

That's what Leo and Oliver Kremer are hoping. The twentysomething brothers last year left Berkeley for New York. Victims of the slack job market, they decided to create their own jobs—by opening Dos Toros Tacqueria, a San Francisco-style Mexican food joint near Union Square. "Really, it was a great time to open a business," said Leo Kremer. "You can negotiate for good rents, and find really great locations." After a few Craigslist postings generated more than 200 résumés, they hired eight full-time and seven part-time workers. With its biodegradable utensils, chairs made from reclaimed barn word, and locally raised chicken, Dos Toros, which opened the night before Halloween, is tapping into the ethos of sustainability.

If the incipient recovery in the economy is to be sustained—and if the bearishness about employment will be overcome—it will be by the likes of these two bulls.

Jessica Ramirez contributed to this story, which also appears in Newsweek.

Daniel Gross is an editor and columnist at the Daily Beast.