Employers Hold Off on Hiring

From the Wall Street Journal | Oct 21, 2009

By TIMOTHY AEPPEL and CONOR DOUGHERTY

Companies
across the economy are holding off on hiring even as the profit outlook
improves, amid economic uncertainty and their own success at raising
productivity in rough waters.

Hiring always lags behind in economic recoveries, but the outlook
this time is worse, many economists say. Most forecasters now expect a
prolonged period of high unemployment, even though the government is
expected to report next week that the economy grew in the third
quarter, after four quarters of contraction. That is sure to frustrate
the jobless and could be a problem for the Obama administration.

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Christian Hansen Photographer for The Wall Street

An employee worked at a D'Addario guitar string factory in Farmingdale, N.Y.

There
are several major factors behind the trend, which is coming on top of
sharper-than-expected job cuts in the recession. Many businesses have
nagging doubts about the durability of the upturn, attributing much of
the recent growth in orders to a move by their customers to rebuild
inventories and to government stimulus spending, rather than underlying
strength in their markets.

Businesses also face uncertainty about the potential costs of
regulatory moves -- such as an expansion of health care and climate
legislation -- that could drive up costs. And many employers have
learned how to produce more with a smaller number of people than they
previously thought possible.

That is what happened at D'Addario & Co. in Farmingdale, N.Y.,
one of the world's leading producers of guitar strings. Business began
reviving in August, roughly when economists believe the recession
ended. Chief Executive James D'Addario credits an influx of orders from
retailers and China's guitar factories. But he sees much of this growth
as a reaction to the slump earlier this year, when his customers were
frantically slashing inventories to conserve cash. "Now, the pipeline's
empty," he said.

Christian Hansen Photographer for The Wall Street Journal

CEO
Jim D'Addario, shown Friday at the office of guitar-string maker
D'Addario & Co. in Farmingdale, N.Y., sees no need to start hiring
workers. 'I estimate we can produce 15% to 20% more with the same
number of people,' he said.

Still,
Mr. D'Addario sees no reason to start hiring. He shed 150 workers and
cut hours during the darkest days of the slump, bringing the head count
down to 950. A host of efficiency moves -- such as teaching many
workers to inspect their own work, which let D'Addario go from 17
inspectors to 10 -- has saved so much labor that there's no need to
hire now. "I estimate we can produce 15% to 20% more with the same
number of people," he said.

The same story is being repeated across the economy -- in factories,
hotels and banks. The average workweek is now down to 33 hours, the
lowest since records started in the 1960s. Productivity, or output per
hour of work, grew at a 6.6% annual rate in the second quarter, as
employers shed workers faster than they cut output. It was the largest
increase in any quarter since 2003. Productivity grew at a 2.5% pace
from 2000 through 2008.

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"
I
own a small company. If I had two times more work than I could handle,
I would still hire no one, knowing that the bubble ... will pop.
"

- Darren Reid

"Businesses
have been so aggressive in cutting labor input that productivity rose
noticeably in the first half of the year," Federal Reserve staff
economists told officials at their September meeting, according to
minutes released last week.

Some employers have started calling back workers, and some are expanding. Steel mills and auto factories have reopened. Cree Inc., a Durham, N.C., maker of lighting fixtures, earlier this month said it would add 275 jobs as part of an expansion.

But most employers haven't resumed hiring. The U.S. has shed 7.2
million jobs since the recession began in December 2007, the deepest
contraction since the Great Depression. Even if the job market started
spitting out jobs as fast as it did during the 1990s boom, adding 2.15
million private-sector jobs a year, the U.S. wouldn't get back to a 5%
unemployment rate until late 2017.

"Given
the uncertain outlook in the economy and credit conditions, firms are
reluctant to hire," says economist Mark Gertler of New York University.
"This is a very tough labor market. It looks like it's going to be a
slow process."

At the Sheraton Maui Resort & Spa in Hawaii, general manager
Chip Bahouth said the recession prompted his hotel to look hard at ways
to save money.

Service businesses pose distinct challenges. Unlike factories --
which can automate -- a service business is defined by people vacuuming
rugs and scrubbing toilets.

Even so, Mr. Bahouth found ways to nip and tuck. The coffee cart in
the hotel lobby used to open at 6 a.m., but sold only about 10 cups in
the first hour. So the hotel started opening it at 7, reducing one work
hour each day for the cart operator. Similarly, the hotel used to have
two full-time carpet cleaners who ran lumbering machines that
deep-cleaned about 10 rooms each a day. By staging big drums of
cleaning solution in closets on each floor, workers no longer have to
make trips to a basement stockroom to refill their machines, and each
can now clean up to 15 rooms a day.

Christian Hansen Photographer for The Wall Street Journal

At
D'Addario's factories, many employees recently have been taught how to
inspect their work, reducing the need for paid inspectors.

Productivity
growth is ultimately good for companies, workers and the economy. More
productive companies have greater profits, which allow them to pay
higher wages. That also allows the economy to grow faster without
generating inflation. But in the short run, stretching existing workers
means hiring fewer new ones.

Another reason not to hire new workers: Many companies already have
excess labor on hand. After reducing hours and cutting overtime during
the recession, they can easily increase production by simply adding
hours for existing workers.

There's also the fear factor. As companies cut back, remaining
workers often picked up the slack. At 352 Media Group, a Web design
firm in Newberry, Fla., head count has been reduced to about 40 from 50
a year ago. But Peter VanRysdam, a company principal, said he notices a
lot more cars in the parking lot when he gets in each morning.

In a two-week pay period in January, before the layoffs, Mr.
VanRysdam said, the company had 1,065 billable hours across 33 Web
developers. In the most recent pay period, the company had 1,329 hours
from only 26 people.

"After the cuts were made, the people that are still here...are
motivated that much more," he said. "They know they can't just put
their résumé out there, because this is happening across the industry."

Write to Timothy Aeppel at timothy.aeppel@wsj.com and Conor Dougherty at conor.dougherty@wsj.com