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Rising Unemployment, Who Cares?
05/24/01
By: Margaret Popper, BusinessWeek Online
Free-spending consumers seem to be turning a blind eye to layoffs. That's good news for Wall Street and Main Streetalike
It seems the American consumer has decided to ignore the specter of layoffs. In April, retail sales rose as the unemployment rate jumped to 4.5% of the workforce. Then the May consumer-confidence numbers showed an improvement. True, the number of initial claims for jobless benefits dropped slightly in the first few weeks of May, but the dip was hardly big enough to be called a trend. In fact, the prevailing view is that monetary policymakers are still waiting for the other shoe to drop -- more layoffs and another plunge in consumer confidence.
Consumers, however, seem to be taking the downturn in stride, which is good news for investors. This cavalier attitude is at once heartening and frightening. Weighing in at two-thirds of gross domestic product, consumer spending is key to our economic health. As long as it keeps up, we may avoid a recession. But if you're wondering if all this shopping is just fiddling while Rome burns, the reality is the rise in unemployment sounds scarier than it is.
HARD-WON WORKERS. So far, layoffs haven't taken a bite out of consumers' incomes for several reasons. After four years of fighting an ever-tightening job market, employers don't want to cut their hard-won workers too quickly -- indeed, many are using the current downturn to upgrade talent. People who lose their jobs aren't out of work for long. And time is on employees' side. The longer into the slowdown companies wait to lay people off, the less it pays to do so given the costs associated with severance and eventual rehiring.
That doesn't mean unemployment won't rise. The second-quarter earnings picture is likely to look worse than the first quarter, and some companies may announce layoffs to try to soften the blow. Most economists are betting that unemployment will creep up to around 5% by yearend. But the current slowdown likely won't reach the level that would cause consumers to chop up their credit cards -- and that should help keep stock prices rising.
Despite what consumers may say about their economic outlook in confidence surveys, what really affects spending is the number of dollars in consumers' bank accounts. "If you track consumer confidence with consumer income, you see confidence has no effect on income," observes Allan Meltzer, professor of political economy at Carnegie Mellon University. "Income is what consumers see and feel. Confidence is determined by what they read."
RISING WAGES. The bottom line for consumers is that, despite rising unemployment, real income growth is still positive on average. "Pay rises are showing a lagged reaction to the tight labor market, and wage compensation is still accelerating," says Christophe Bianchet, an economist at Credit Suisse Asset Management. Real disposable income -- the total after excluding inflation -- increased by 1.1 percentage points in the first quarter over a year earlier.
More than a few experts hold the view that we've probably seen the worst of layoffs already. "If you are going to go through layoffs, you want to take action as early and as decisively as possible," says Robert Walker, CFO of Agilent, a Palo Alto, Calif., telecom and pharmaceuticals-equipment and -components maker. Agilent's management is so wary of missing the economy's rebound that it avoided layoffs by asking people to take salary cuts or work fewer hours.
Lowering pay is a controversial strategy that carries the risk of losing top employees to competitors. But cutting pay has considerably less impact on consumer income than cutting jobs. Employees have shown themselves willing to take a salary cut, provided it's clearly temporary. "We've tried to say that we have an immediate need to reduce costs in the short term," Walker says.
TOO MANY HOURS. The greater availability of temporary labor boosts companies' ability to ask for this kind of sacrifice. "Temporary workers have low expectations," says George Myers, a professor of organizational behavior at the University of Michigan. "It's no great surprise to them to be cut, and to some, it's a relief." In the tight labor markets of 1999 and 2000, many temps found themselves working many more hours than they wanted.
One telltale sign that companies are planning for a brighter future is the amount of hiring that's still going on, even where there have been layoffs. "We're seeing a lot of layoffs going out the front door, and new people coming in the back door," says Daniel Moynihan at Compensation Resources Group, a human-resources consulting firm that caters to middle-market companies in industries ranging from high-tech to health care to manufacturing. Note that Goldman Sachs cut 12% of its investment bankers at the same time that it plans to bulk up its asset-management division by 3%.
Moynihan says that companies are using the slowdown as an excuse to upgrade their personnel. "They're using the General Electric model: Keep the top 20% of your employees totally happy, the middle 70% fairly happy, and get rid of the bottom 10%," he says. "Smart companies are being opportunistic because they realize this slowdown will be nothing more than a blip on the screen."
CUTTING THE BOTTOM. The phenomenon of cutting less-productive workers and adding more-productive ones may actually result in a higher average wage when all is said and done, points out Marci Rossell, chief economist for Oppenheimer Funds. "These layoffs are coming from the tech sector, where executives are asking their management to rank their workers based on production and cut the lowest 25%," she says. "Those are the people with the lowest bonuses." That may be partly why the Labor Dept. statistics on compensation costs for non-farm civilian workers rose 1.1% the first three months of 2001.
To be sure, recruiters and H.R. professionals definitely see a tougher job market than that of 18 months ago. But that's not saying much. The average professional with 7 years to 10 years experience may need 8 to 12 weeks to find a job. At the vice-president level and above, it may take six months. In a historical context, that's not bad.
"Those seem like fairly normal numbers to me," Moynihan says. They are longer lead times than those of late 1999 and early 2000. But that was the anomaly, not the standard. "It would be unusual for the job market to exhibit the 1999 robustness as long as earnings are continuing to fall," says John Lonski, an economist for Moody's Investor Service.
STILL MALL-HAPPY. If people are out of jobs only for a couple of months, that shouldn't make much of a dent in consumer spending. To get to the level where consumers postpone trips to the mall, we'd need initial jobless claims to be about 40% higher than they are, according to Credit Suisse's Bianchet.
The current four-week moving average of initial jobless claims is around 400,000. "If you scale the current jobless claims to the total labor force, it's still at a low level -- around 0.29%," he says. In 1991, that ratio hit 0.47%. "Initial claims would have to be around 550,000 weekly to reach that level," Bianchet adds.
With corporate psyches still bruised from the last four years of tight labor markets, it seems unlikely that we'll see that many jobless claims in this downturn, barring some unforeseen shock to the system. So, don't be surprised if you still can't find a parking space at the mall. And while that's the case, along with Wall Street, there's little need to worry that a recession looms.
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