What Comes Next?

Forecasters remain uncertain about U.S. employment and economic growth.

By Jennifer Schramm, GPHR Jan 1, 2013
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0113cover.gifWhat economic factors should HR professionals keep top of mind as they develop business strategies, plan benefits, hire employees and manage retention for 2013?

It depends on whom you ask.

The economy “always has an impact on HR” says Tamara Spoerri, director of human resources at Bowdoin College in Brunswick, Maine. For her, key factors in 2013 will be the overall strength of the U.S. economy and health care costs, including those related to implementation of the Patient Protection and Affordable Care Act.

For Lindsay Nienhuser, HR director of chemical manufacturing and U.S. business operations for Dyno Nobel Inc., market conditions remain front and center. The commercial explosives company based in Cheyenne, Wyo., focuses on “the oil and gas industries and what is happening in the commodities market.”

Brian Pearlman, vice president of human resources at Propex Operating Co., says global economic performance “will certainly impact how we go about attracting, recruiting, developing and planning for talent in 2013.” His international infrastructure solutions company is based in Chattanooga, Tenn.

It makes sense that HR professionals in diverse industries focus on different variables when planning the year ahead. After all, being a strategic business partner requires understanding specific sectors, markets and locales. While such analyses lead to tailored HR strategies, they also make for complex and sometimes contradictory forecasts.

Yet forecasters and business leaders, including HR professionals nationwide, all start with the same economic indicators as a base. With complexity and uncertainty plentiful these days, getting comfortable making decisions despite mixed economic messages now is a vital skill.

When studying different indicators for the year ahead, HR professionals must weigh positive and negative aspects of the economic recovery and develop strategic plans that make sense for their organizations and employees.

Mixed Signals

Several U.S. economic indicators in the last half of 2012 were slightly better than predicted, but uncertainty remains as 2013 begins. While the average U.S. consumer was mainly focused on the latest monthly jobs numbers and unemployment rates, and seemed to be growing more confident in the final months of 2012, economists voiced concern about:

  • How U.S. lawmakers would address the so-called fiscal cliff when the terms of the Budget Control Act of 2011 were scheduled to take effect Jan. 1.
  • Struggling economies in the European Union.
  • The full financial impact of Hurricane Sandy.

How these and other factors play out will set the economic tone in 2013—and determine the pace of the jobs market. An upswing in job creation could generate challenges for HR professionals in retaining their best workers. On the other hand, another downturn could spell trouble when it comes to keeping employees motivated and maintaining training and benefits budgets.

Moving Forward

When you’re getting ready to develop your HR business strategy, first consider some of the more positive news. Real U.S. gross domestic product grew at an annual rate of 2.0 percent in the third quarter of 2012, according to the U.S. Department of Commerce. This followed a GDP growth rate of 1.3 percent in the second quarter of 2012 and was slightly higher than most economists’ forecasts. The higher growth rate was partially driven by rising consumer activity.

Consumers were more confident in November than they had been in almost five years. The Conference Board Consumer Confidence Index rose to 73.7 in November from 73.1 in October, the highest levels since February 2008.

This increased confidence was most likely due to a gradually improving job market. The U.S. Bureau of Labor Statistics’ Employment Situation Report for November 2012 found that total nonfarm payroll employment increased by 146,000, though the unemployment rate was essentially unchanged at 7.7 percent. Since the beginning of 2012, employment growth has averaged 151,000 jobs per month. From July to October, the economy added an average of more than 170,000 payroll jobs per month, higher than the average for 2012 overall.

This suggests that as 2012 wound down, hiring was picking up. In October, employment rose in professional and business services, health care, and retail trade. Retail benefited from improved consumer sentiment, as reflected in a CareerBuilder survey that found 36 percent of U.S. retailers would be hiring for the 2012 holiday season, up from 29 percent in 2011.

Cautious Response

Despite these positive signs, many economists are lowering their 2013 forecasts for U.S. economic growth due to:

  • Continued weakness in developed economies.
  • Slower growth in emerging economies.
  • Steady but not spectacular U.S. domestic job growth.

Economists responding to an October National Association for Business Economics Outlook Survey “expect economic growth to be tepid overall in 2012 and 2013, but predict growth to slowly accelerate through 2013, with GDP reaching a 3 percent pace by the fourth quarter of 2013,” says survey chair Shawn DuBravac, chief economist at the Consumer Electronics Association. Forecasters at Moody’s Analytics were more optimistic—assuming policymakers address fiscal issues. Mark Zandi, Moody’s chief economist, forecasts that “by 2014, real GDP growth will approach a 4 percent annual pace, with job growth of more than 250,000 per month and unemployment declining steadily.”

Meanwhile, Conference Board forecasters called for slightly lower growth in the U.S. economy in the first half of 2013, down to below 1 percent, with growth rebounding to slightly above a 2 percent pace in the second half of 2013.

“The prospects for 2013 are probably going to be just a shade better than what they were the last two years,” says Michael Montgomery, a senior economist at IHS Global Insight. Job growth was fairly slow in 2011 and 2012, and Montgomery predicts this slow but steady growth will continue into 2013.

From a policy perspective, the results of the U.S. elections have reduced uncertainties around fiscal and other agendas. For example, it is unlikely that there will be a radical shift in Federal Reserve monetary policy, and many provisions of the Patient Protection and Affordable Care Act will be implemented during the coming months. Insurance exchanges, where individuals and small businesses can buy health benefits plans, begin open enrollment this fall.

While policies such as these that were thrown into doubt during the election will now take shape, their impact on businesses and hiring remains uncertain. For example, employers and HR professionals are still studying how health care reform will affect benefits strategies and bottom lines. In addition, individual states have achieved varied progress in putting together health exchanges; in states that delayed development, HR professionals will deal with more uncertainty.

For Spoerri, who is based in Maine, one of the states where health exchanges have not yet been set up, the details of how the exchanges will be run and what this will mean for how she administers benefits plans are not yet clear, making it difficult to plan ahead.

Pearlman agrees that many HR professionals will find it difficult to nail down the specific impacts the law will have on their benefits strategies while so many states are still early in the process of setting up exchanges and complying with other aspects of the law. “Until we see health care reform in its final form, there will continue to be uncertainty in the impact it will have on how companies in general react in terms of their hiring practices,” he says. For example, some employers may rein in hiring plans or hire more part-time employees, at least until they are more certain of the bottom-line impact the law will have on their benefits costs.

Globally, economists remain similarly cautious. In its October World Economic Outlook, the International Monetary Fund noted that “in advanced economies, growth is now too low to make a substantial dent in unemployment. And in major emerging market economies, growth that had been strong earlier has also decreased.” As a result, the IMF revised its April forecasts for 2013 growth from 2.0 percent to 1.5 percent for advanced economies and from 6.0 percent to 5.6 percent for emerging markets and developing economies.

Furthermore, expectations of GDP growth in notable emerging economies such as Brazil, India and China have been less robust than in previous years. Here, too, forecasts for 2013 have recently been revised downward. For example, the World Bank had previously forecast 8.2 percent GDP growth for China in 2012 and 8.6 percent in 2013, but it has now revised its forecast to only 7.7 percent growth for 2012 and 8.1 percent for 2013.

Overall, however, the World Bank projects global GDP to accelerate to 3.0 percent in 2013 and 3.3 percent in 2014.

Factors That Will Influence Prospects for Economic Growth

Many variables could affect the nation’s economic trajectory. Some key factors:

Wages. According to forecasts from compensation experts, the average compensation budget increase for U.S. companies for 2013 hovers around 3 percent—up slightly from 2012. WorldatWork, The Conference Board and Hay Group all forecast 3 percent salary budget increases for 2013. For midsize and large U.S employers, Mercer forecasts the 2013 average raise in base pay to be 2.9 percent, while Aon Hewitt expects 3 percent for executive, salaried exempt and salaried nonexempt positions and 2.9 percent for nonunion hourly and 2.6 percent for union positions. The results of a Towers Watson Data Services Salary Budget Survey show planned increases at an average of 2.9 percent in 2013 for salaried employees other than managers.

According to the U.S. Bureau of Labor Statistics’ Employment Cost Index, for the fiscal year that ended in March, overall wages and salaries grew by an average of 1.7 percent. However, consumer prices rose 2.7 percent during that time. How overall wages compare to rising consumer costs will be a factor in the economic recovery. If wages do not keep up with higher consumer costs, consumer spending could be tamped down, discouraging overall economic growth.

Interest rates. The Federal Open Market Committee of the Federal Reserve Board announced in October that it “expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time.” In particular, the committee noted that it would keep its target range for the federal funds rate at 0 to 0.25 percent and forecasted “that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” Without a major hike in the pace of recovery, the U.S. interest rate will continue to hover near zero.

Inflation and consumer costs. The September Consumer Price Index showed an increase of 2 percent in the all-items index before seasonal adjustment. An increase in the gasoline index was notable: It rose 7 percent in September after increasing 9 percent in August. The other major energy indexes increased in September as well. Rising consumer costs could affect consumer spending across the board in 2013.

Another cost that continues to outpace inflation and could have a lasting impact on the U.S. talent pool: the cost of higher education. In a November report, the College Board showed that college costs continue to outpace general inflation by a wide margin.

Housing and construction. In October, the U.S. Census Bureau reported that U.S. households were increasing at a rate of just above 900,000 per year, a substantial increase from 2011 when the country added only about 635,000 households. The Harvard Joint Center for Housing Studies projects that the moderate but steady pace of economic growth in 2012 will finally translate into increased demand for housing in 2013 and beyond, and this will help support a sustained recovery. The Census Bureau also announced in October that construction spending during September was estimated at a seasonally adjusted annual rate of 0.6 percent above the revised August estimate and 7.8 percent above the September 2011 estimate.

These numbers have housing experts growing more optimistic. “The share of distressed sales has gone down over time and it will continue, barring an unforeseen change in circumstances,” said Laurie Goodman, senior managing director of Amherst Securities, speaking at the National Association of Business Economics’ annual conference in October. According to a real estate forecast by PwC US and the Urban Land Institute, “the real estate recovery is set to advance in 2013 as modest gains in leasing, rents and pricing will extend across U.S. markets from coast to coast and improve prospects for all property sectors.”

Global trade. Forecasts for world trade in 2013 have been revised downward. The World Trade Organization has downgraded its 2013 estimate for world trade expansion from 5.6 percent to 4.5 percent.

Growth of emerging markets. In the last few years, robust growth could usually be seen in emerging markets, especially India and China. While growth is still expected in emerging economies, forecasters have revised their 2013 predictions downward slightly.

Weakness in developed markets. Countries of the beleaguered eurozone are most likely to experience low to negative growth. “Central banks continue to maintain very low policy rates,” said International Monetary Fund economic counselor Olivier Blanchard at a World Economic Outlook press briefing in October. Two forces “continue to pull growth down. The first is fiscal consolidation, and the second is a still weak financial system. Banks are still weak, and their position is made worse by low growth.” Uncertainty stymies growth in developed economies, and worries about the ability of policymakers to effectively address fiscal policy challenges such as the U.S. fiscal cliff and sovereign debt issues in the eurozone may continue to weigh on growth and investment.

Political developments. Unexpected political shifts of a similar magnitude to the Arab Spring are always a possibility. Their economic impact would depend on their intensity and the economic influence of the region where they take place.

Environmental issues and natural disasters. A proliferation of weather-related events or other natural disasters could affect economic policies, especially those related to combating climate change.

—Jennifer Schramm Source: SHRM, Jobs Outlook Survey Report, October 2012.

Focus on U.S. Jobs

As they move into 2013, HR professionals and staffing specialists also forecast a mixed picture. It’s true that there has been job growth, but there continues to be weakness in some industries. “There are going to be pockets of growth and areas of decline and some in between,” predicts Dan Ryan, principal of Ryan Search & Consulting.

In December, the Society for Human Resource Management’s (SHRM) Leading Indicators of National Employment index—based on a monthly survey of approximately 1,000 HR professionals across the country—showed that hiring expectations were up for manufacturing in four out of the last five months compared to the same time a year earlier, while the private-service sector showed five consecutive months of year-over-year increases in hiring expectations.

Moreover, 45 percent of HR professionals reported optimism about the jobs outlook for the fourth quarter of 2012, according to SHRM’s biannual Jobs Outlook Survey Report. Thirty-two percent reported that they were adding staff in that quarter, compared with only 9 percent decreasing head count. However, 59 percent of the more than 400 respondents said they were maintaining their current head counts. For some HR professionals, a waitand- see attitude could prevail in early 2013. Others, working in markets where consumer demand is picking up, will boost hiring.

On the one hand, business leaders “are reluctant to bring on head count because they don’t want to have to pare back again. Companies are very much hedging their bets,” Ryan says. At the same time, HR professionals in some industries and companies are in positions where they simply must start hiring, either because demand is up or because they are starting to experience the impact of the first waves of Baby Boomer retirements. “They have situations that just can’t wait,” Ryan explains. For instance, he sees strong hiring activity among his manufacturing clients experiencing increased demand for products. He predicts that will continue in 2013, accelerating the need for additional head count.

To balance growing demand with future uncertainty, many business leaders have turned to temporary and contract workers. 2012 was “a pretty good year in the temporary staffing business. We are projecting growth in 2012 of 9 percent in terms of temp staff in the U.S. It’s growing faster for sure than the traditional labor source,” says Barry Asin, president of Staffing Industry Analysts. “Growth but uncertainty—that generally is a good scenario for the use of contingent labor. Assuming the economy continues to grow, we think we’ll see new high levels in the use of temporary staffing in the next year or so.” Asin also sees high demand and skills shortages in information technology, engineering and health care.

So, while economists and HR professionals seem to agree that 2013 may be a mixed bag when it comes to the global economy, the jobs picture in the U.S. may be brightening. Among the indicators inviting optimism: improved monthly government employment figures and an ongoing rise in the percentage of HR professionals predicting increased hiring during coming months.

As a result, however, HR professionals may need to pay renewed attention to employee retention and are likely to experience recruiting difficulty for some key jobs. “What would really impact us is if the economy took a huge upswing and there would be more jobs available for people to shop around,” Nienhuser predicts. Employees “are content for the time being, but that could change if the economy picked up. Then we could see an increase in turnover.”

Overall, there is optimism that as long as fiscal policymakers do not drop the ball—admittedly, a big if—there will be steady improvements in the 2013 economy. And many economists are even more optimistic about the years beyond 2013.

“The year to look for things to much more noticeably improve is not 2013,” Montgomery says, “but 2014 and 2015.”

The author is manager of the Workplace Trends and Forecasting program at SHRM.

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