The jobless recovery is helping companies' bottom lines. That's a problem.
September 8, 2003: 8:34 AM EDT
By Justin Lahart, CNN/Money Senior Writer
NEW YORK (CNN/Money) - Wall Streeters may fret that even though the economy is growing like gangbusters, firms aren't hiring.
But they're happy to take the fallout from companies' unwillingness to increase their payrolls: Better earnings.
For most businesses, wages are a major, if not the major, fixed cost. No matter what your take is in any given month, you have to shell out cash to your workers. What you pay out doesn't change all that much if your workers are racing to keep up or if they're sitting around reading Russian novels while waiting for orders to come in.
That's why employment is a lagging indicator. As the head of a business, when business starts to go south you don't shed workers right away, because you don't know whether what you're seeing is just a temporary fall-off or something bigger. If it's just temporary, after all, letting workers go will be disruptive and costly. The opposite is true when the economy starts to pick up -- since you don't know if it's a false start, you hold back.
This dynamic helps companies' bottom lines immensely when the economy begins to recover. Because they have cut so many workers out over the course of the downturn, costs are much lower, and because they are slow to hire workers back, those costs stay low in the initial stages of recovery. The country has lost 2.8 million jobs since March of 2001 -- that's a lot of cost cutting. Is shouldn't be much of a surprise that with the economy growing at around a 5 percent pace in the current quarter, analysts think that S&P 500 earnings will be up by around 15 percent.
But with the economy and earnings growing so fast, businesses should be boosting hiring. In fact, until the 1990-1991 recession, businesses tended to start hiring just a few months after the economy troughed. Yet, here we are, 21 months after the recession ended, and still no jobs. It's taking even longer than in the 1990s' "jobless recovery" for hiring to come back.
Part of the slowness of jobs to come back is probably due to structural changes. Manufacturing, for instance, is a much smaller component of the economy and the labor force now, and for manufacturers it is a more pressing matter to hire on workers when business picks up than it is for the service sector.
But there are other factors. One is a world that seems much less safe. Two years after Sept. 11, companies are always mindful of the threat of terrorism. The potential that a single event could suddenly halt business again means that they're going to be far more slow to hire.
An even more important factor, however, may be that so many companies still feel like they're in investors' doghouse. After all the overreaching of the late 1990s, and all the scandals of last year, they need to get back into Wall Street's good graces.
What's the best way to do that? Grow earnings. What's the best way to grow earnings? Keep overhead low. How do you keep overhead low? Don't hire. When third quarter earnings come in gangbusters, don't forget the hidden cost.
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