Economy's Growing, but Where Are the New Jobs?

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Economy's Growing, but Where Are the New Jobs?
Firms are expanding without hiring. Some analysts wonder if this change is permanent.
By Nicholas Riccardi
Times Staff Writer

February 15, 2005

Carlton Guthrie sees bright times ahead. After weathering the 2001 recession, his manufacturing company has made enough money to pay off some debt and position itself to expand.

But he's not planning to add jobs.

"I don't see us hiring anytime soon," said Guthrie, co-chairman of Detroit Chassis, which makes chassis for motor homes. "I see a tremendous amount of room for us becoming more efficient."

Guthrie's ability to expand his business without enlarging the payroll — a feat achieved by many executives across the nation — helps explain why job creation continues to be sluggish even while the economy appears to be booming.

The U.S. economy grew at a brisk 4.4% clip last year, but it was not until last month that the number of jobs recovered to the levels of early 2001. The Labor Department pegs the unemployment rate at 5.2%, the lowest in four years, but the share of people who have stopped hunting for work is the largest it has been since 1988. Today's job growth is more than twice as slow as it was after the 1990-91 recession, and slower than during any recovery since World War II, analysts say.

The discrepancy is fueling a growing debate about whether such low employment growth is a harbinger of a world in which businesses can rake in increasing profits without much of it trickling down to workers.

"Until now, this recovery has been all about businesses," said economist Mark Zandi of Economy.com, an economic research firm in West Chester, Pa. "Businesses are in about as good a financial shape as I've seen them."

Instead of aggressively adding workers, corporations have been buying labor-saving equipment, banking cash, distributing record dividends, buying back stock or undertaking ambitious mergers that often lead to job losses.

There is a wide range of reasons for these choices. Manufacturers such as Guthrie are pinched by price competition and required to continually cut costs. Other executives are wary about expanding payrolls in a time of ballooning healthcare premiums. Companies are cautious about bloating their staffs, remembering the excesses of the late 1990s. And shipping jobs out of the country still seems cheaper than paying American salaries.

The high level of corporate profits and cash leads many analysts to forecast that more jobs will be created down the road. History shows, they argue, that excess cash is eventually spent, creating opportunities for workers. The last time the country fretted about a so-called jobless recovery was during the early 1990s — just before an avalanche of employment stemming from the tech boom.

Another factor that could soon lead to more job growth: slowing gains in productivity. Companies have squeezed just about all they can out of existing workers through labor-saving technology and efficient management practices, analysts say.

Skeptics point to the fact that wages remain relatively flat, growing slower last year than the rate of inflation — translating into a cut in take-home pay for many workers. That stagnation indicates to skeptics that the traditional business cycle — in which growth leads to a tight labor market that bids up wages — may be a thing of the past.

"The big question is: Has there been some structural change, in that what we're seeing in the rearview mirror doesn't apply to what's in front of us?" asked Jared Bernstein of the liberal Economic Policy Institute in Washington.

Drew Brosseau, managing director of investment company S.G. Cowen, thinks he has an answer: Money is increasingly being invested in high-technology sectors that do not require as many people as do old-fashioned factory jobs.

"A lot of the information industries that are drivers of growth these days are not as person-intensive as manufacturing," Brosseau said.

Even though it is a manufacturer, Detroit Chassis also has become less person-intensive.

After the 2001 terrorist attacks, the recreational vehicle market collapsed. With orders plummeting, Detroit Chassis co-Chairman Guthrie laid off about 50 workers and cut salaries by 30% across the board — including management.

Guthrie has since revamped the way his plant assembles RV frames to squeeze every ounce of efficiency out of his staff, boosting output by about 30%.

Sales now have improved enough for him to bring pay levels back to where they were before the terrorist attacks. And he's retired about 30% of his company's $8-million debt.

"We're doing well," he said.

Now, Guthrie said, workers are finding new efficiencies every day. In return, he's not cutting jobs but redeploying employees to new ventures, such as creating safety products for RVs and trucks. "We're running at warp speed right now," he said.

But those endeavors will not require more employees quite yet, Guthrie said. He said he could hire more people by the end of the year if the ventures do well, but, for now, improvements in technology and organization will allow him to make new products with the same staff.

Guthrie's not alone.

Businesses have increased productivity mightily in the last three years, with gains of 4% or more annually — the highest since World War II, economists say. That, coupled with consumer demand, has allowed companies to turn profits without adding many jobs.

To see how businesses hold back hiring, analysts say, just look in their bank accounts.

Corporations are sitting on $4.7 trillion in liquid assets, according to a survey by Treasury Strategies, a Chicago-based company that studies business liquidity. That's well above the $3.6 trillion of 1999 but down slightly from the $5-trillion high of 2003.

However, as much as 30% of the money and cash equivalents is invested in instruments that will mature in one year or more — a sign that cash will remain stashed away awhile longer, said Tony Carfan of Treasury Strategies.

"There is a lot of cash out there," said David Huether, chief economist of the National Assn. of Manufacturers. "Profits have picked up a bit, but I think that firms still are a little conservative in terms of expanding plants and equipment."

Not all businesses are reluctant to add jobs. W.W. Grainger Inc., a retailer of manufacturing products based in Lake Forest, Ill., is expanding its sales force. It added 800 jobs last year.

But Jim Ryan, the company's group president, said that was atypical. "We're still seeing some conservatism in the economy," he said.

Such conservatism, analysts say, could push workers to rein in their spending. Because consumer spending has driven the current economic expansion, any pullback could increase the risk of "a deceleration of economic activity," said John Lonski, chief economist at credit rating firm Moody's Investors Service.

Lonski, however, said he didn't see that happening. He contended that businesses' aversion to hiring could lead to an unexpected labor shortage this year. And businesses still have all that cash.

"It's difficult to be gloomy about employment prospects," Lonski said, "when we're in a virtual ocean of liquidity."

But that liquidity can go to places other than the labor market.

For years, Microsoft Corp. was growing so quickly and making so much money that its cash piled up. In December, the software giant released a chunk of the money — $32.6 billion in dividend payments to its shareholders, a sum so immense that it drove up the nation's personal income that month.

Brosseau of S.G. Cowen, who follows the company, said it wouldn't make sense for Microsoft to pour that cash into hiring more programmers.

"It doesn't matter how much money they spend on Windows; you can only create a new version of Windows so fast," Brosseau said. "The PC industry is now, arguably, 25 years old and has matured to the point where you shouldn't be expecting that to be a growth industry anymore."

Brosseau said Microsoft was expanding into new areas and investing more in its workforce than other technology firms. Microsoft is planning to hire 6,000 to 7,000 workers this year — more U.S. workers than it has added in the last two years combined.

Microsoft and other cash-rich companies also are snapping up other companies, setting off a surge in mergers and acquisitions — and resultant job cuts.

SBC Communications Inc. last month agreed to purchase AT&T Corp., and 13,000 jobs are expected to be lost. Oracle Corp. paid $11 billion to buy PeopleSoft Inc. in December and has dropped an estimated 5,000 employees.

One of them was Sharon Marsh. The 44-year-old Dublin, Calif., resident was PeopleSoft's manager of corporate meeting services. But since last month, she's been pounding the pavement looking for work.

"There's not that many options out there for me," she said.

Initially, Marsh tried shopping as therapy, and she's going to movies and lunching with old friends — the sort of consumer activity that helps businesses make money. But she said the realities of unemployment would change all that.

"Now I'm going to stop this, live frugally," Marsh said, "because you don't know what's going to happen."

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