Uncertainty compels US employers not to hire

Hesitation is weakening the US economy, as Monday’s disastrous day on Wall Street reaffirmed what many companies and ordinary Americans have been fearing for weeks: This is too tumultuous a time for businesses or households to be contemplating expansion.

Just a few months ago, analysts were predicting that the economy would grow about 4 per cent this year. The forecast is now closer to half that amount as a wave of pessimism sweeps the country.

“Everybody gets into this hangdog demeanor with respect to economic expectations,” consulting firm A T Kearney chairman Paul Laudicina said. “People sit on their wallets because they feel like everything is going to get worse, and things get worse because people are sitting on their wallets.”

There are some signs of encouragement, including retail buoyancy at high-end department stores, improved car sales and even mild construction growth. But the nerve-racking scenario that now has pessimists in ascendance got its statistical kick start late last month, when the government reported that the economy had grown much more slowly than originally thought during the first half of the year.

A few days later, after a bruising fight, Congress passed a compromise bill to cut the federal debt that very few saw as a meaningful long-term remedy. And by last week, the stock market started its precipitous slide, which continued Monday after Standard and Poor’s downgraded the federal debt after the close of business Friday.

The chain of events has made the prospect of another recession, a so-called double-dip, an obsession on Wall Street and in board rooms and living rooms across the country. For many businesses, it is already suppressing hiring.

In Houston, for instance, Pamela Clark, vice president of a family-owned paint company, had a flurry of new orders earlier this year and began searching for an office clerk and a paint maker.

It was the first time the company, the Preservo Paint and Coatings Manufacturing Co, had considered hiring since the recession. But Clark has yet to offer anyone a job. Orders have become unpredictable as clients, including the makers of blow dryers and bathtubs, say they feel uncertain about the economy and what the government is doing about it.

“There is no logic to how it goes any longer,” Clark said, adding, “So we’re in a holding pattern to see what’s going to happen with the economy.”

But the watchfulness extends beyond hiring. The most recent government reports of
consumer spending and factory orders show that both have been falling. The prices of commodities have also dropped in anticipation of an economic slowdown, with crude oil down 29 per cent since April. Shoppers for homes are also delaying offers as jitters grow about the stock market, real estate agents report. Prospective buyers like Nicole Zachariae are haunting the housing market. Late last week, on the heels of a 500-point one-day drop of the Dow Jones index, Zachariae and her husband, Brian, went house-hunting. The lush green cul-de-sacs of northern New Jersey were as enticing as ever, but Nicole Zachariae was suddenly feeling more protective of her money – and less eager to buy. “I don’t live and die by the market,” she said, “but this has rocked me.”

Shannon Moore, a real estate broker in Sarasota, Florida, said many people are electing to wait out the turmoil on the sidelines. “I don’t know how many tours I’ve given where people say, ‘I’ll be back in three months’,” she said. Some housing experts warn that further declines in home prices could help set off another recession.

“The wait-and-see attitude begets more bad economic data, and it can become a self-fulfilling prophecy,” said Andrew D Goldberg, market strategist for JP Morgan Funds, an asset manager.

The downward cycle that could be at play is known by some economists as a “feedback loop”, when one piece of bad economic data has a way of making everything else worse. When unemployment, now at 9.1 per cent, is high, for example, companies have little incentive to pay workers more. And with sales in a slump, they do not hire. That means those people with jobs have no pay raises to spend, and those out of work, of course, have little money to spend at all. That, in turn, means sales do not go up, and companies do not hire.

Home buyers put off their purchases, too, further depressing prices and keeping the market for home improvements and other big purchases like washing machines weak.

And the stock market dip means that even those with the means to spend are likely to hold back because they feel poorer. “It is a nasty feedback loop with negative consequences for the consumer, the jobs market and for the economy,” said Allen L Sinai, chief global economist at the consulting firm Decision Economics. Since employers began adding back workers in March of last year, they have hired 1.75 million people, far fewer than the 8 million who lost their jobs during the recession.

The pace of hiring, which accelerated to an average of 1,78,500 a month in the first four months of this year, has slowed considerably, to less than half that in the last three months.

Although hiring picked up in July, employers added 1,17,000 jobs, barely enough to keep pace with normal population growth. Signs of future growth are still subdued: The Conference Board reported on Monday that its Employment Trends index had declined for the third time in four months and that employers were likely to add just 1,00,000 net jobs a month for the rest of the year. Moreover, state and local governments under financial stress are likely to continue layoffs for the rest of the year.

While the risk of another recession has certainly increased in recent weeks, what many economists fear most immediately is continued wheel spinning.

“One of the worst outcomes of the great recession is a great stagnation, where you just have an economy that is hovering along,” said Heather Boushey, senior economist at the liberal Center for American Progress. “And because of that, there is no urgency” among policymakers to address job creation in a fundamental way, she said.

One pocket of recent strength has been auto sales, which accelerated after a stall in the spring. In July, all of the Big Three Detroit automakers posted healthy sales increases. Jeff Schuster, executive director of global forecasting at JD Power and Associates, a market research firm, said he expected sales in the second half of this year to run 9 to 10 percent ahead of last year’s figures.

Such resilience has prompted some car dealers to hire. Chris Meyer, general manager for the Ford and Lincoln flagship location of Heiser Automotive in Milwaukee, said he had hired three new salespeople since the beginning of the year and had openings for two more. Elsewhere, though, a hold-tight mentality pervades.

“The important thing is to get stuff out the door so we can get paid by our customers,” said Roger J Sustar, owner of Fredon, a maker of precision parts for the aerospace and locomotive industries based near Cleveland. Although he had no layoff plans, he said, he had no plans to hire, either.