THE NATION

For Many Firms, Jobless Recovery Is a Good Thing

U.S. employers are in no hurry to resume hiring as increased productivity cuts their need for workers.

By David Streitfeld

Times Staff Writer

November 13, 2003

The economy roared last quarter, and so did Falcon Plastics Inc.

A family-owned firm in the eastern South Dakota city of Brookings, Falcon posted record sales in September. Yet there's no impulse to celebrate, no rush to hire. The bad times are still too vivid.

"We want to make sure that when we add someone, we won't have to turn around in three months and let them go," Falcon President Jay Bender said.

Multiply Falcon's situation by tens of thousands of other companies, and a picture begins to develop of an economy climbing a wall of worry.

On Friday, the Labor Department announced that employers added a net 126,000 payroll jobs in October. In all, the economy has added 286,000 positions over the last three months — the best showing since early 2001.

But 2.4 million more jobs would be needed to regain all the ground lost since March 2001, when the last recession began. When, or even if, those positions will come back is far from clear.

Here's the problem: Many companies like the notion of a jobless recovery. The leaner they can keep their U.S. payrolls — by using overtime, automating the production process and outsourcing jobs overseas — the higher their profits.

The murky hiring picture affects not only the 8.8 million unemployed but the 1.6 million who want a job but aren't actively looking for work. It affects millions more who want a full-time job but must get by with part-time work. And it weighs on the more than 130 million employed.

"The greatest single concern people appear to have about the economy is jobs," investment house Fred Alger Management Inc. said in its November market review. "We have companies and an economy that can shift gears quickly, but not the kind of job creation and job security that people understandably seek."

For Falcon, as for many companies, the 2001 downturn was swift and harsh. Annual sales tumbled from $20 million to $14 million. The 305 employees shrank to 175. "Sometimes," Bender said, "you have to cut off your arm to save your life."

The emergency surgery was a success. For the fiscal year that ends in April, Falcon expects again to hit sales of $20 million. But the payroll is back to only 200 workers. Any further growth, Bender said, "will be incremental. We're still very cautious."

So, too, are consumers. Although the economy expanded during the third quarter at its fastest rate in 19 years, people's confidence in the future remains "middling," noted Richard Curtin, who directs the University of Michigan's monthly consumer survey. The tenuous job situation is a big reason.

"It used to be understood that when business weakened, layoffs went up. When it improved, people were called back to do the same jobs at the same employers," Curtin said. "Now, if people lose their jobs, they have to find new skills and a new job at a new employer. It's a more daunting challenge."

It's one that many stand to face, even as the economy picks up steam. The job placement firm of Challenger, Gray & Christmas reported that planned layoffs at U.S. firms were 171,874 in October, more than double September's total and the highest in a year.

Duke Energy Co. said it would eliminate 8% of its global workforce, or 2,000 jobs. Sony Corp. will cut several thousand U.S. jobs as part of a major restructuring. Tyco International Ltd. said it would do away with 7,200 jobs, or 3% of its labor force.

In some cases, the cuts were accompanied by solid earnings reports. Boise Cascade Corp. said sales increased 9% in the third quarter and profit nearly quadrupled. But the wood products firm is continuing layoffs, which have reduced the number of employees by 460 this year and will lop off an additional 90 during the fourth quarter.

Electronic Data Systems Corp. fulfilled Wall Street's expectations for the third quarter, but the computer services company nonetheless announced it would cut an additional 2,500 jobs in its third layoff in a year.

One major company going against the trend is IBM Corp., whose chairman, Samuel J. Palmisano, says he foresees the need in 2004 "for approximately 10,000 new positions in key skill areas." IBM has 315,000 employees, roughly the same number it had when the boom peaked in 2000.

However, fewer than half its workers are in the U.S., and Palmisano didn't specify where the hiring would take place. Alliance@IBM, a union representing workers at the technology company, said the announcement was a "smokescreen" for the fact that many IBM jobs were being transferred overseas, where they would be filled by Indian or Chinese software engineers.

For its part, the Bush administration suggests that the employment picture is bound to improve next year as the economy continues to strengthen. And there are some promising signs. First-time unemployment claims unexpectedly dropped last week to their lowest level since early 2001. Although initial claims often are revised upward, economists were heartened by the report, saying it could be further evidence that the drought in jobs was coming to an end.

Analysts say 150,000 jobs must be created every month just to keep pace with population growth. Only if more than that number are created would the unemployment rate, currently 6%, continue to fall.

"There can't be a jobless recovery," Treasury Secretary John W. Snow recently told the Economic Club of Washington. "The nature of a recovery is to recover. You don't recover if lots of people are looking for work and can't find work."

Yet that's just what's happening in some places. A survey of 74 companies by Pacific Staffing, which supplies temporary workers to hundreds of local businesses in the Sacramento area, found that most weren't planning to add employees. "We haven't seen a big spike the way you would have in previous recoveries," said Pacific Staffing President Jay Jurschak.

If investments aren't being made in new people, money definitely is being put down for new equipment. Business spending on equipment and software rose 15.4% in the third quarter, the biggest jump since the first quarter of 2000.

Pine Hall Brick Co. in Winston-Salem, N.C., just built its fourth factory and retooled part of an older plant. Both are now heavily automated. As a result, Pine Hall's brick-making capacity is up about 25% — but its employee count has risen only 10%.

"It's better for us now, and for our employees," said Pine Hall President Fletcher Steele. "We took the guys who used to move bricks by hand and trained them to operate machines. The employees who remain are more highly skilled."

Falcon Plastics, which makes custom injection moldings, restructured during the recession out of necessity. It also gambled on a better future, increasing the size of one plant from 30,000 square feet to 50,000.

By this point, the Falcon factories are fairly humming. Employees are working 48 hours a week — "some voluntary, some mandatory," Bender, the president, said. Despite the fact that they're getting time-and-a-half for those extra hours, Bender said it's no more expensive than giving benefits to new workers.

All of this helps explain why the unemployment rate in Falcon's home state, where two of its three factories are located, isn't dropping faster.

South Dakota's jobless rate nearly doubled from 1.9% in March 2000 to a recessionary peak of 3.7% in December 2001. The most recent rate, in September, was only marginally improved at 3.4%.

Doing more with fewer workers cuts across the economy. Intel Corp., the Silicon Valley chip maker, reported third-quarter sales rose 20% and net income more than doubled compared with the same period last year. The reason: increased productivity. Over the last four years, Intel has been building wafer fabrication plants in New Mexico, Arizona, Oregon and Ireland.

"They're a huge capital investment, but the payoff is tremendous," spokesman Chuck Mulloy said. "We can make more than twice the number of units with the same staff."

For the fourth quarter, Intel projects sales as high as $8.7 billion. That would equal its record achieved in the fourth quarter of 2000, when the company had 86,000 employees. Current employment is 79,000. There are no plans to add more in the U.S. until the economy "improves significantly," Mulloy said.

Productivity is up just about everywhere. In the third quarter, nonfarm productivity rose 8.1%, a rate exceeded only twice in the last decade.

"If you survived the last few years, you've done it by being really mean and lean," said Scott Montrey, a spokesman for the National Assn. of Manufacturers. "And once you get lean and mean, you don't go back to being fat and lazy."

The trouble, economist Nick Perna said, is that "if every company was lean and mean, the economy would be in serious recession."

Perna — who is credited with coining the term "jobless recovery" more than a decade ago — is hopeful that, as confidence builds and the economy expands, hiring will follow. After all, the jobless recovery of the early '90s eventually gave way to a lengthy, job-packed expansion.

"In the best of all worlds, we'll get rapid productivity growth and, when people are displaced, they're able to find work in other sectors," Perna said.

John Challenger, chief executive of Challenger, Gray & Christmas, the placement firm, is more bleak.

"My sense is that hiring and job creation will be meager," he said. "There are huge transformative forces at work, with technology and globalization forcing us in different directions. I think we're in uncharted territory."