US economy picks up but hiring outlook stays cloudy

WASHINGTON (AP) – Companies are more productive, fewer people are seeking unemployment benefits and service companies are adding jobs.

Ideally, those trends could signal stronger growth, followed by more hiring. Yet until consumers consistently spend more, businesses are unlikely to hire enough to drive down unemployment.

But more consumers need jobs and raises to keep spending enough to help the economy grow. The paradox has kept the economy from thriving more than two years after the recession officially ended.

It’s also why economists think the unemployment rate stayed at 9.1 percent for a fourth straight month in October. The government will issue the October jobs report Friday.

“We’re creating jobs, but it’s not enough to ... increase wages measurably,” said Ellen Zentner, an economist at Nomura Securities.

Thursday data reinforced that message. Weekly applications for unemployment benefits dropped to a seasonally adjusted 397,000, the Labor Department said. It’s only the third time since April that applications have fallen below 400,000.

Still, applications would need to fall below 375,000 to signal sustained job gains. They haven’t been at that level since February.

Services companies, which employ about 90 percent of the work force, hired more in October after cutting jobs in the previous month, according to a survey by the Institute for Supply Management.

Overall growth for the service sector — which covers businesses from restaurants and hotels to financial services firms and retail companies — was mostly unchanged from September’s slow pace.

Companies ordered more factory goods in September for a third straight month, the Commerce Department said. The gain occurred largely because businesses spent more on industrial machinery, computers and software. It’s a sign that in the sluggish economy, many companies are investing in equipment but not in new hires.

Businesses are getting more out their existing work forces while paying less to employ them. Worker productivity rose in the July-September quarter by the most in a year and a half, the Labor Department said. At the same time, labor costs fell.

The jump in productivity was due largely to the economy’s best quarterly growth in a year without much change in hiring or hours worked.

Higher productivity is generally a good thing. It can raise standards of living by enabling companies to pay workers more without raising their prices and increasing inflation. But without strong and sustained customer demand, companies are unlikely to hire.

Consumers helped drive this summer’s growth by increasing their spending at triple the rate from spring.

When demand rises and productivity is low, it’s usually a sign that businesses have reached the limit on the work they can squeeze from their work forces. That often leads some to hire more workers, if they want to grow.

But economists worry that consumers won’t be able to sustain this summer’s spending binge. In the July-September quarter, they spent more while earning less. They used their savings to make up the difference. Without more jobs and higher wages, consumers are likely to pare spending in the months ahead.

That may already be happening. Shoppers slowed their spending in October, according to monthly revenue results reported by retailers Thursday. Costco, Macy’s, Saks and Target are among the companies that reported results that fell slightly below Wall Street analysts’ expectations.

Weaker sales figures at big chain stores open for more than a year is a bad sign ahead of the winter holiday shopping season.

Federal Reserve Chairman Ben Bernanke said Wednesday that growth is likely to be “frustratingly slow,” after the Fed sharply lowered its economic projections for the next two years.

The Fed now says the economy will likely expand no more than 1.7 percent for all of 2011. That’s down from its June forecast of 2.7 percent to 2.9 percent. And it predicted growth of only 2.5 percent to 2.9 percent next year, nearly a percentage point lower than its June estimate.

The Fed said it doesn’t expect the unemployment rate to be any lower this year. And it sees unemployment averaging 8.6 percent by the end of next year.

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