To understand why jobs in the US are so scarce, consider John McFarland and Nicole Rosen. The two share something in common: They’re reluctant to spend freely.
McFarland is chief executive officer (CEO) of Baldor Electric in Fort Smith, Arkansas; Rosen is a consumer in Washington state. Each is earning and saving money. Yet McFarland won’t hire until consumers spend more. And Rosen won’t spend more until jobs seem secure.
Therein lies the standoff that helps explain the weakness of the US economic recovery and the depth of the jobs crisis. Each side — employers on one, consumers on the other — is waiting for the other to spend more. Until then, the recovery will likely feel shaky. And job openings will be few.
Which side will blink first? Many economists predict it will be businesses. Sometime this year, many companies are likely to decide they must replace worn-out equipment or they can’t squeeze any more output from their existing staff, according to estimates from Moody’s economy.com and IHS Global Insight. Some will then ramp up hiring.
Yet business expansion and hiring are likely to remain so modest that it could take until 2011 or 2012 for consumers to respond by opening their wallets wide, Moody’s economy.com and IHS Global Insight predict. Once they do, households are expected to finally unleash a pent-up demand for appliances, clothes and cars.
Until then, consumers and employers will likely remain wary of hiring or spending much. The jobless rate, now 9.7 percent, will stay high. And employers will create nowhere near the roughly 10 million jobs that economists say are needed to restore the job market to its pre-recession health.
“There’s a little bit of a standoff — a chicken-and-egg problem,” said Robert Reich, a professor of public policy at University of California, Berkeley.
Reich holds out the possibility the stalemate will end soon. But short of a major industrial innovation — some new energy technology, for instance — he thinks businesses will remain slow to hire and consumers wary of spending freely for most of this year.
The government likely won’t help much. Stimulus spending is waning. So are the Federal Reserve’s emergency support programs.
That leaves more of the job-creation burden to employers and consumers.
Yet companies are hoarding cash. And consumers — squeezed by flat wages, a tight job market and shrinking home equity, and loath to take on more debt — are stashing away savings and paring debt. They did begin to spend more in the past few months. But only slightly so.
Jobs aren’t likely to be created without robust consumer spending because shoppers fuel about 70 percent of economic activity in the US.
Since the financial crisis erupted, consumers have focused on saving. In 2009, the US personal savings rate reached 4.3 percent, the highest since 1998.
Companies, meanwhile, are “sitting on a mountain of cash,” said Nariman Behravesh, chief economist at IHS. The volume of cash US corporations have on hand equals about one-tenth of annualized GDP over the past 12 months — near a record high, according to an IHS analysis of US Commerce Department data.
Eventually, businesses will need to replace old equipment or invest in projects that were delayed by the recession. And at some point, they won’t be able to get their employees to keep producing more.
Productivity rose by an outsize 6.9 percent last quarter. The productivity gains will eventually slow. Hiring would be needed to boost output.
Steven Fazzari, economics professor at Washington University in St Louis, cautions that even if companies ramp up spending this year, they will eventually pull back unless consumer demand responds with enough punch to justify further hiring and investment.
Corporate investment in computers and office furniture did rise in the second half of 2009. Yet companies remain reluctant to invest in major projects that would require adding workers.
McFarland’s is among them. Baldor Electric makes industrial motors for factories. Sales have ticked up this year. But nothing gives McFarland confidence that economic growth is poised to accelerate.
That’s why Baldor isn’t increasing spending or hiring. It ended 2009 with a record US$215 million in cash flow. In better times, McFarland said Baldor would have plowed that money into upgrading equipment or adding to its work force of 6,500.
This year, Baldor used cash to pay down US$121 million in debt.
McFarland still feels burned from the financial crisis and recession, which led to the biggest year-over-year revenue drop Baldor had ever seen.
After orders all but stopped in December, Baldor had to cut costs. It replaced client visits with phone calls. It slashed the work week at some plants. And it ended overtime pay. McFarland said he’ll be slow to hire again even after business picks up.
So will David Farr, CEO of Emerson Electric. The St Louis manufacturer has 125,000 employees in more than 150 countries, and buying up firms is vital to its business strategy.
But Farr said its overall investment, including acquisitions and new facilities, will grow only about 3 percent by summer. That’s far less than the 10 percent boost he’d consider if consumer spending were higher.
Emerson is doing some limited hiring. But Farr said he won’t consider major job-creating investments — like building plants or expanding production — until demand increases.
If CEOs like McFarland and Farr expect consumers like Rosen to start spending freely again, they’ll be waiting a while. Rosen, 29, manages the budget for her family of four in Roy, Washington state, outside the Fort Lewis Army base where her husband is stationed.
A few years ago, Rosen might have used a credit card to pay for family meals or new electronic gear. As a college student, she said she piled up card debt, buying “stupid stuff” like CDs, movies and restaurant meals.
The freewheeling days are over. Rosen and her husband bought a US$275,000 house in 2006 with an adjustable-rate mortgage. The rate is around 8.5 percent now, and Rosen fears it will rise further.
Her husband makes a steady income as an Army cook. But there isn’t overtime pay to fill in the gaps if their mortgage payments balloon, she said.
Rosen works part time at a tax-preparation agency during tax season. She uses what disposable income she has to shore up the couple’s savings. High unemployment makes her wary of spending much.
“Nobody is giving us the confidence to go out and spend our savings,” she said. “We may need it to pay our house payment. Or we may need it to pay medical bills.”
Reich wonders whether some wild-card factor — a new technology or some breakthrough akin to the spread of the Internet — might eventually ignite both business and consumer spending.
Will it happen?
“In my optimistic moments, I say yes,” Reich said. “Something always seems to come along when you look back at economic history. The times that I just scratch my head, I worry that we’re in for a very long period of high unemployment.”
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