Wall Street Journal
Companies across the economy are holding off on hiring even as the profit outlook improves, amid economic uncertainty and their own success at raising productivity in rough waters.
Hiring always lags behind in economic recoveries, but the outlook this time is worse, many economists say. Most forecasters now expect a prolonged period of high unemployment, even though the government is expected to report next week that the economy grew in the third quarter, after four quarters of contraction. That is sure to frustrate the jobless and could be a problem for the Obama administration.
There are several major factors behind the trend, which is coming on top of sharper-than-expected job cuts in the recession. Many businesses have nagging doubts about the durability of the upturn, attributing much of the recent growth in orders to a move by their customers to rebuild inventories and to government stimulus spending, rather than underlying strength in their markets.
Businesses also face uncertainty about the potential costs of regulatory moves -- such as an expansion of health care and climate legislation -- that could drive up costs. And many employers have learned how to produce more with a smaller number of people than they previously thought possible.
That is what happened at D'Addario Co. in Farmingdale, N.Y., one of the world's leading producers of guitar strings. Business began reviving in August, roughly when economists believe the recession ended. Chief Executive James D'Addario credits an influx of orders from retailers and China's guitar factories. But he sees much of this growth as a reaction to the slump earlier this year, when his customers were frantically slashing inventories to conserve cash. "Now, the pipeline's empty," he said.
Hiring always lags behind in economic recoveries, but the outlook this time is worse, many economists say. Most forecasters now expect a prolonged period of high unemployment, even though the government is expected to report next week that the economy grew in the third quarter, after four quarters of contraction. That is sure to frustrate the jobless and could be a problem for the Obama administration.
There are several major factors behind the trend, which is coming on top of sharper-than-expected job cuts in the recession. Many businesses have nagging doubts about the durability of the upturn, attributing much of the recent growth in orders to a move by their customers to rebuild inventories and to government stimulus spending, rather than underlying strength in their markets.
The average workweek is now down to 33 hours, the lowest since records started in the 1960s
Businesses also face uncertainty about the potential costs of regulatory moves -- such as an expansion of health care and climate legislation -- that could drive up costs. And many employers have learned how to produce more with a smaller number of people than they previously thought possible.
That is what happened at D'Addario Co. in Farmingdale, N.Y., one of the world's leading producers of guitar strings. Business began reviving in August, roughly when economists believe the recession ended. Chief Executive James D'Addario credits an influx of orders from retailers and China's guitar factories. But he sees much of this growth as a reaction to the slump earlier this year, when his customers were frantically slashing inventories to conserve cash. "Now, the pipeline's empty," he said.
Still, Mr. D'Addario sees no reason to start hiring. He shed 150 workers and cut hours during the darkest days of the slump, bringing the head count down to 950. A host of efficiency moves -- such as teaching many workers to inspect their own work, which let D'Addario go from 17 inspectors to 10 -- has saved so much labor that there's no need to hire now. "I estimate we can produce 15% to 20% more with the same number of people," he said.
The same story is being repeated across the economy -- in factories, hotels and banks. The average workweek is now down to 33 hours, the lowest since records started in the 1960s. Productivity, or output per hour of work, grew at a 6.6% annual rate in the second quarter, as employers shed workers faster than they cut output. It was the largest increase in any quarter since 2003. Productivity grew at a 2.5% pace from 2000 through 2008.
"Businesses have been so aggressive in cutting labor input that productivity rose noticeably in the first half of the year," Federal Reserve staff economists told officials at their September meeting, according to minutes released last week.
Some employers have started calling back workers, and some are expanding. Steel mills and auto factories have reopened. Cree Inc., a Durham, N.C., maker of lighting fixtures, earlier this month said it would add 275 jobs as part of an expansion.
But most employers haven't resumed hiring. The U.S. has shed 7.2 million jobs since the recession began in December 2007, the deepest contraction since the Great Depression. Even if the job market started spitting out jobs as fast as it did during the 1990s boom, adding 2.15 million private-sector jobs a year, the U.S. wouldn't get back to a 5% unemployment rate until late 2017.
"Given the uncertain outlook in the economy and credit conditions, firms are reluctant to hire," says economist Mark Gertler of New York University. "This is a very tough labor market. It looks like it's going to be a slow process."
At the Sheraton Maui Resort & Spa in Hawaii, general manager Chip Bahouth said the recession prompted his hotel to look hard at ways to save money.
Service businesses pose distinct challenges. Unlike factories -- which can automate -- a service business is defined by people vacuuming rugs and scrubbing toilets.
Even so, Mr. Bahouth found ways to nip and tuck. The coffee cart in the hotel lobby used to open at 6 a.m., but sold only about 10 cups in the first hour. So the hotel started opening it at 7, reducing one work hour each day for the cart operator. Similarly, the hotel used to have two full-time carpet cleaners who ran lumbering machines that deep-cleaned about 10 rooms each a day. By staging big drums of cleaning solution in closets on each floor, workers no longer have to make trips to a basement stockroom to refill their machines, and each can now clean up to 15 rooms a day.
Productivity growth is ultimately good for companies, workers and the economy. More productive companies have greater profits, which allow them to pay higher wages. That also allows the economy to grow faster without generating inflation. But in the short run, stretching existing workers means hiring fewer new ones.
Another reason not to hire new workers: Many companies already have excess labor on hand. After reducing hours and cutting overtime during the recession, they can easily increase production by simply adding hours for existing workers.
There's also the fear factor. As companies cut back, remaining workers often picked up the slack. At 352 Media Group, a Web design firm in Newberry, Fla., head count has been reduced to about 40 from 50 a year ago. But Peter VanRysdam, a company principal, said he notices a lot more cars in the parking lot when he gets in each morning.
In a two-week pay period in January, before the layoffs, Mr. VanRysdam said, the company had 1,065 billable hours across 33 Web developers. In the most recent pay period, the company had 1,329 hours from only 26 people.
"After the cuts were made, the people that are still here...are motivated that much more," he said. "They know they can't just put their résumé out there, because this is happening across the industry."
