Strong productivity, which has held off inflation in the record expansion, could lead to job losses in the slowdown prescribed by the Federal Reserve.
With economic data pointing to a slowdown, it seems more and more evident the Federal Reserve Board is piloting the economy to the soft landing everyone has hoped for.
But even the softest economic landing may be harder on American workers than many people think. This is the view of James Paulsen, chief investment officer at Wells Capital Management in Minneapolis, who fears that even a slight decline in economic growth could translate to more severe job losses than have been typical in previous downturns.
Why might a slowdown be tougher on the labor force this time? Because of the marvel of U.S. productivity, the very thing that has allowed the economy to go full steam without creating inflation.
"What we now herald as a miracle because it holds inflation down becomes a nasty thing in a slowdown," Paulsen said. "If your productivity is as good in an economic slowdown as it is in an expansion, it accelerates job losses because you can produce more with even less."
Job creation has been slowing since 1997, when annual payroll growth peaked at 2.5 percent. Today, payrolls are rising by 1.8 percent, yet gross domestic product growth is red hot. "If it only takes 1.8 percent job growth to produce 6 percent real GDP growth," Paulsen asked, "could we end up in a situation where a soft landing of 2 percent to 2.5 percent growth means jobs falling by one-half or 1 percent a year?"
Paulsen has studied the relationship of job creation and economic growth since 1950 and found that even in difficult economic times, job growth was much higher than it is today. For instance, from 1980 through 1984, a period that included two recessions, each percentage point increase in gross domestic product growth translated to a 0.61 percent rise in job growth. But since 1995, every percentage point rise in growth has resulted in just 0.10 percent more jobs.
A soft landing could be painful for workers for other reasons. In recent years, corporations have become obsessed with efficiency gains. This mindset could change management behavior in a downturn, Paulsen said.
"In the past, companies would cut capital spending in an economic slowdown," he said. "But capital spending has become efficiency spending, and companies may decide to maintain capital expenditures this time and cut the labor force instead."
The merger mania of recent years also may contribute to greater-than-usual job losses if the economy slows. From the mid-1970s to the mid-1990s, Paulsen says, there were an average of 2,000 mergers and acquisitions a year. At this year's pace, 10,000 deals may be done in 2000. "If you hit a slowdown, you're going to find out that all these merged companies have excess labor forces," he said. Case in point for his argument is Qwest Communications International Inc., which acquired U S West in June. On Thursday, the company said it would eliminate 12,800 jobs by the end of 2001 and increase its capital spending to improve service and invest in its core business.
If consumers were in sounder financial shape, the job losses that a slowdown might bring would not be so worrisome. But installment debt and stock market margin debt carried by consumers now are an astounding 24.5 percent of disposable personal income. Between 1965 and 1995, this figure averaged 18.4 percent. It is off the charts thanks to margin debt, which accounts for more than 3.5 percent of disposable income today, up from an average of 0.78 percent for the 30-year period ended in 1995. This debt load also means that consumer spending could contract significantly, exacerbating the downturn.
Of course, a slowdown in the economy is not yet certain. Although Paulsen expects growth to average 2 percent in the next 12 months, others don't agree. Nevertheless, as Paulsen points out, the productivity story has been a hugely positive one in an expanding economy. Its potential impact in a contraction has been largely ignored.