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."