'Jobless recovery' a result of business caution after recession

Geo. M. Martin Co. is in one tough business -- making the machines that make corrugated boxes. It's an industry that's been shrinking as hundreds of the manufacturers that use such boxes close shop in the United States and move factories overseas.

Despite those fierce headwinds, the company managed to boost its sales 16 percent last year by expanding in such specialty niches as machines that fabricate multicolored containers. Yet even as the company's top line grew, its head count stayed constant at about 115 workers.

"We shipped more equipment last year than we did the year before, and we kept the same work force," said Bob Morgan, the company's president.

"Anybody in business today has to look at their costs. With every business that's out there, it's the same: 'I want a lower price and faster delivery.' All the old rules, the old ways of doing business are out the window."

Martin's situation highlights one of the central features of today's business environment -- rapid economic growth doesn't automatically mean rapid job growth any more. Competing in an unforgiving global marketplace, American businesses large and small are using every strategy in the book to keep payrolls down.

The result has been the notorious jobless recovery, now morphed into a slow-job-growth expansion. For this stage of the economic cycle, when output of goods and services is expanding at a healthy clip, the nation is creating shockingly few jobs.

In January, about 34 months after the onset of recession, payrolls outside the farm sector were still down 1.8 percent from their prerecession level, according to the Economic Policy Institute, a liberal research group in Washington. That marks the first time since World War II that job totals remained lower than their previous high so long after a recession.

From September through January, the nation added a total of 366,000 jobs, far short of normal. By now, payrolls should be expanding by about 200,000 or more each month.

Astonishingly, even a three-month period of torrid economic growth didn't boost jobs. From July through September, when economic output grew at an 8.2 percent annual rate, the fastest pace in two decades, payrolls actually shrank by 3,000 jobs.

"This is unprecedented," said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University. "This is the first time a major developed economy has seen healthy growth without any jobs being added."

Chances are the labor market will take a turn for the better. Most forecasters expect job creation to pick up in the months ahead as a growing economy forces employers to hire. But most experts believe job creation will remain disappointingly tepid.

The consensus of forecasters polled by the newsletter Blue Chip Economic Indicators is that the nation's economy will grow 4.6 percent this year, stellar by historical standards. But they say the unemployment rate will still average 5.5 percent in the fourth quarter, down from the 5.7 percent level registered in January.

Dhawan predicts that, by the second half of the year, payrolls will grow by about 150,000 per month. That, he stressed, would be lackluster. "It represents 60 percent of what was the norm in the late 1990s," he said.

The shortfall of jobs has emerged as a top issue in the presidential campaign. Democrats never tire of repeating that more than 2 million jobs have disappeared in the past three years and reminding that President Bush is almost sure to be the first chief executive since Herbert Hoover to end his term with fewer people collecting paychecks than when he began.

Administration officials last month disavowed a projection made by Bush's economic advisers that the nation would add 2.6 million jobs this year, a forecast most economists viewed as unrealistically rosy.

All the same, economists say the causes of the weak labor market are rooted in fundamental changes in the way America does business. They are not things over which the White House has much control.

When sales slumped in 2001 and 2002, businesses started slashing costs in general and payrolls in particular to shore up the bottom line. The trend was most notable in such hard-hit industries as computer hardware, software, air transport, hotels and industrial equipment.

"Businesses were very desperate to try to turn a profit," said Paul Kasriel, chief economist with Northern Trust, a Chicago bank. "Up until the third quarter of last year, sales volumes were not increasing very rapidly. Selling prices were not growing. In order to maintain profits, you look for ways to cut costs."

The question, of course, is why employers are still slow to rebuild staff now that sales and profits are bouncing back. The answer, it seems, is that the business recovery is too recent and too tentative to induce them to reverse course decisively.

The harshness of the recession "left a psychological impediment to hiring aggressively," said Russell Goldsmith, chief executive of City National Corp., a Beverly Hills. Calif., banking company. "People are skittish about rebuilding the cost structure they have just spent painfully pulling apart."

In addition, several long-term business trends are working to keep permanent hiring down.

The "Wal-Martization" of American business is putting tremendous pressures on suppliers to keep prices at rock bottom.

The movement of manufacturing and service jobs to low-wage locations around the world, such as China and India, means that part of the job gains that normally occur during an expansion are taking place on the other side of the globe.

Similarly, employers are expanding their use of temporary and contract workers. Temporary employees are counted as jobholders, but contract workers are regarded as self-employed and don't show up on anybody's payroll.

Although wages are growing slowly, health care and other benefit costs are rising rapidly. As a result, total compensation costs rose 3.8 percent in 2003, significantly higher than the rate of inflation, according to the Labor Department.

Companies are meeting rising demand by pushing improvements in productivity.

Add P-I Business headlines to