Productivity Push
Companies aim to increase profits without new hires
By KATE BERRY
Staff Reporter
Is the wait finally over?
After several years of sluggish growth and stock market doldrums, terrorist scares and corporate scandals, the economy appears to be on the verge of real growth.
Though 2003 began with the war in Iraq and mixed economic signals, the second half of the year witnessed a solid rebound in stock prices, productivity and corporate earnings.
Market watchers are giddy about a “second leg” of the current bull market, while executives anticipate a year of record corporate profits.
Left out of the equation, however, has been the kind of growth specifically job growth that normally comes with any expansion. L.A. County unemployment still hovers around 7 percent and UCLA’s Anderson Forecast projects that California will add just 134,000 jobs next year, a growth rate of less than 1 percent (and actually a bit higher than the projections for the nation).
That leaves companies confronting the prospect of trying to expand again without major plans to hire new workers.
They’re doing it in many cases by shifting jobs overseas in the inexorable push toward globalization, and by investing in business software and equipment to further increase productivity and cut costs.
Employment has always been a lagging indicator of the economy, but some economists see structural changes at the heart of the current “jobless” turnaround. That means a greater reliance on temporary workers, major cutbacks in employee benefits, and a continued decline in the manufacturing sector.
“We are seeing a recovery without job growth but with a rebound in profits and in non-manufacturing sectors,” said Michael Fishman, executive vice president and national director of loan originations at Wells Fargo Foothill, as asset-based lender in Santa Monica.
There are certain factors that could keep a lid on expansion next year. The dollar continues its free fall. The war in Iraq and terrorism continue to be ongoing threats. And the two towers of the massive trade and federal budget deficits not to mention the California budget debacle and its ensuing costs are holding back certain sectors.
Nevertheless, Fishman said dealmaking in the fourth quarter has picked up dramatically and he expects robust merger and acquisition activity in 2004.
“In the technology arena, companies are exporting jobs overseas to China, India and Russia, which has allowed them to improve the bottom line even without revenue growth,” he said. “It’s an interesting recovery because much of the improvement is coming from getting costs under control.”
What may not be good for workers has been a boon for corporations.
The Bureau of Economic Analysis, the arm of the Commerce Department that also calculates gross domestic product, revised corporate profit numbers upward by nearly $130 billion for the third-quarter ended Sept. 30, to $869.7 billion. That represents a 25 percent jump in corporate profits from $700 billion in the like quarter a year earlier.
A rebound in business spending this year, primarily in computer software, accounts for the surge. While the housing sector cools off, some industries like hospitality and travel, technology and software, as well as defense are showing solid gains.
Aerospace rebound
Christopher Thornberg, senior economist at UCLA’s Anderson Forecast, projects the addition of 263,000 non-payroll jobs in L.A. County for 2004, a 1.6 percent increase. Job growth was stagnant this year with a loss of 18,000 jobs alone in the fourth quarter.
“It certainly isn’t a rebound, per se,” Thornberg said. “The weakness of the state government budget problems and the manufacturing sector are the big issues.”
Even so, Brett Meinsen, vice president of finance and administration for Reinhold Industries in Santa Fe Springs, expects a stronger 2004 with an increase in spending that’s related to the national missile defense program. Reinhold expects the biggest increase in revenue from the Minuteman missile, the 650 nuclear weapons that are sitting in silos across the country to defend the U.S. against a nuclear attack.
The company provides propellants and installation components for the Minuteman, which is undergoing a major retrofitting approved by Congress years ago.
“We expect $13 million to $15 million a year on programs through 2007 related to the Minuteman,” Meinsen said, adding that another Reinhold unit providing aircraft seat frames to the commercial airline industry is unlikely to turn around until late 2005. “We’ve seen a substantial decrease in that business over the last few years because of what Boeing and the airlines are going through.”
Peter Conley, managing director of MDB Capital Group LLC in Santa Monica, said a strategic shift has taken place in the past two years, with companies cutting debt, laying off workers and containing costs.
“Now we’re seeing CEOs and boards redirecting their spending and budgets towards growth,” he said, adding that investments in information technology, network security, data storage and private networks have captured a large chunk of research and development dollars.
The flip side is the lackluster performance of the dollar.
While the stock market gains for the trailing 12 months appear strong, with the Dow Jones Industrial Average up 17.4 percent and the Standard & Poor’s 500 Index up 18 percent, both major indices have suffered declines when recast against the euro.
“It looks like we had a great year but the question is, will the foreign investor be back in 2004 for a repeat performance?” asked Conley. “How sustainable is the performance of the market if, adjusted to the euro or the yen, foreign investors are losing money and we need $1.5 billion a day in long-term capital inflows?”
If you believe, it will come
At the heart of this recovery is a sentiment among high-end investors that 2004 will be a strong year.
A survey in November found that more than 70 percent of California residents with invested assets of $100,000 or more believe the economy and the stock market would perform better next year compared with this year. The survey of 680 Californians was conducted by Nuveen Investments.
Bernard Zaia, managing director at Barrington Associates, said that more companies are coming to the table for a variety of deals. He referred to one business-to-business firm that is spending an additional $6 million over the next 18 months to save on operating costs.
Still, much of the information on capital spending is anecdotal because no group tracks spending on a regional basis.
“For a good period of time, people were holding onto their wallets, but now companies are becoming more efficient by spending on technology,” Zaia said. “We’re starting to see companies returning to make capital expenditures. Lots of productivity gains have been achieved by technology and now they’re trying to return to a pattern of growth.”
The much-beleaguered manufacturing sector received a jumpstart last month, according to the Institute for Supply Management’s purchasing manager’s index, a gauge of the manufacturing economy that takes into account new factory orders and production, which jumped to 62.8 percent in November to a 20-year high.
“Everything looks real good when it comes to the economy but technically we have not had a quick rebound in employment that often accompanies this kind of growth,” said Dawn McLaren, an economist at Arizona State University’s Bank One Economic Outlook Center, which publishes the Western Blue Chip Economic Forecast.
Joseph Magaddino, an economist and chairman of the department of economics at Cal State Long Beach, said his forecast shows negative job formation for the region, though some of that is coming from Northern California, which has lagged behind Southern California because of the technology bubble that burst in 2000.
“The bad news is we don’t see any positive growth in 2004 in manufacturing, though we are seeing productivity gains,” Magaddino said. “Next year is not going to be a great year, but it’s a year where we’re moving back on track and 2005 will be much stronger for the region.”
Voices
Scott Anderson
Senior Economist
Wells Fargo Bank
“We’re just not seeing any strength in employment. California may actually lag the rest of the U.S. in job growth because it has a lot of structural problems that limit employers’ aggressiveness in adding workers. Business costs in the state are limiting corporate expansion.
“Capital expenditures are up from where they were at the beginning of the year but we don’t have very good numbers to track it on the state level. Our sense is that there is more spending right now on technology hardware and computer software as companies replace old equipment. And we’re expecting more capital equipment spending by manufacturers.
“When CEOs and CFOs see their profits are rising, it boosts the stock market and when it comes time to budgeting they’re more likely to boost spending on equipment and software.”
Domenick Miretti
Marine Clerk
International Longshore and Warehouse Union Local 63
“Let’s say the economy does bump up. As worker, I wonder what kinds of jobs are going to be created? If you look at the people being employed, a lot of those jobs are not full time and they have no benefits. If you have that kind of a workforce, they’re not going to buy cars or houses, so I don’t see what’s going to fire this economy.
“The philosophy of the employer today is they’re going to outsource any new jobs overseas instead of employing people here. Already at some terminals there’s been a 30 percent loss in terms of clerk work and yard work for those of us that interact with truckers when they pick up a container.”
Christopher Cagan
Director of Research and Analytics
First American Real Estate Solutions
“Housing prices will continue to rise in 2004 but at a slower rate. Prices are getting a little high after the boom years of 2002 and 2003. L.A. County housing prices rose about 22 percent this year, and we expect prices to rise another 14 percent in 2004. Next year will be a slower year but still a good year to sell, because prices remain high, and a good year to buy, because interest rates remain relatively low.
“This is just the normal ebb and flow of the business cycle. I predict interest rates will rise to 6.7 percent next year and above 7.1 percent in 2005 because of the twin federal budget deficit and trade deficit, both are at half a trillion dollars. That makes the dollar much weaker.”
Joseph Magaddino
Chairman
Department of Economics
Cal State Long Beach
“Next year is not a great year but it’s a year where we’re moving back on track, and 2005 will be much stronger for the region.
“We expect 1.3 percent growth in 2004, which is below what we should be seeing for the region. It looks to us that as the national economy starts to improve its performance, then that will help Southern California.
“The bad news is we don’t see any positive growth in 2004 in manufacturing, which is still showing job losses, or non-durable manufacturing. The apparel sector is vulnerable to foreign competition. We do think those sectors will turn around in 2005.
“Where we should see some growth is the information sector and motion pictures. Construction is still healthy. Information technology service jobs are coming back simply because we see more software purchases. Another area that looks good is leisure and hospitality after going through an extended period of contraction.”
Kate Berry
