Is Your Job Safe?
A bitter winter has descended on the American economy. Widespread layoffs-and the fear of firing-will keep a chill in the air during 1992
Jerry Brown is a frozen statue of desperation. Standing stiffly on an icy Detroit street corner for hours on end, the 41-year-old former meatpacker, who has been out of a job for three months, feels his stomach growl from hunger and his fingers sting from cold. The unemployed laborer stares blankly at passersby but says nothing; his sign--a flimsy plywood square with the jagged inscription "Will work for food"--says everything. Those simple words have helped Brown secure $20 worth of ditchdigging but not much else, and, as his misery mounts, he wonders if he will survive the bitter winter that has descended on the economy.
Half a world away, far from downtown Detroit's despair, George Bush is panhandling, too. Frightened by election year polls, which show that 71 percent of voters disapprove of his economic stewardship and 62 percent fear the worst of the downturn is yet to come, the president is tramping across the Pacific Basin this week, hoping to persuade Japan and other Asian allies to lower trade barriers and buy more American goods. The result, claims Bush, will be a flood of "jobs, jobs, jobs" at home for thousands of downtrodden citizens like Jerry Brown.
The president's peregrinations are supposed to convince voters that he cares about their financial woes, but the White House is kidding itself if it believes that this Pacific overture will rebuild Brown's shattered standard of living or persuade Americans that Japan is to blame for the nation's economic problems. Both the struggling politician and the stricken laborer are feeling the wrath of a wicked recession that is the longest on record since the Great Depression of the 1930s. The current downturn is also unlike any the country has experienced in the post-World War II era, the result of years of profligacy and irresponsible government policies. The heavily burdened economy is saddled with too much productive capacity and too few orders. And its financial stability is at risk because many assets, such as commercial real estate, have failed to earn enough to service the debt that financed them. At best, it will take years for the nation to lighten its debt load and absorb its factory glut. This means that investment in new plants, offices and homes will continue to stagnate during the early 1990s, that job creation will remain exceedingly weak and that bloated companies in both the service and manufacturing sectors will keep laying off millions of Americans in the name of profitability.
Slashing jobs. Since the start of the recession in July 1990, 1.9 million jobs have been lost in this country. Last year, 25 million people--or 20 percent of the work force--were unemployed at some time, according to Audrey Freedman of the Conference Board. And the percentage of industries in which employment has contracted has climbed to 63 percent, a level not reached since the 1981-82 recession. Job cuts, often at the best-known companies in America, now average 2,600 a day, up from 1,100 a day in the first quarter of 1991. In December, for example, General Motors, Xerox and IBM expunged 100,000 employees from their payrolls. Unfortunately, many of these layoffs will be permanent. "I don't see the United States regaining a substantial percentage of the jobs lost for five or 10 years," says Joseph Gorman, chief executive of TRW, which recently announced plans to reduce its work force by 10,000 through layoffs and divestitures.
Blue-collar workers traditionally suffer during recessions, but for the first time in recent memory, white-collar workers are also being laid off in droves. So far in this downturn, excluding health-care employees, 854,000 service-sector positions, many of them managerial, have vanished. White-collar employment, in sharp contrast, grew during the recession of 1981-82 by 838,000. "There will absolutely be more white-collar cuts to come," predicts Michael Walsh, CEO of Tenneco, which recently announced plans to pare 6,000 positions from its payroll in 1992. Walsh's dire forecast doesn't bode well for George Bush, because white-collar layoffs affect his political base. Says Lawrence Mishel of the Economic Policy Institute, "The income of suburban independent and Republican voters is being affected by these cuts."
No relief. Many economists believe that corporations will continue to slash workers--from the executive suite to the factory floor--for the rest of the decade. Dan Lacey, editor of Workplace Trends newsletter, for example, predicts that the nation's top 500 companies will trim their payrolls by at least 4 million more employees over the next eight years. Economist Gary Shilling is even more pessimistic. He thinks overall joblessness will jump from just under 7 percent today to 10 percent by the end of 1992 and that unemployment for those with four or more years of college could soar from 1.8 percent in 1988 to 9.8 percent by 1998. Shilling further estimates that joblessness will average 9 percent over the course of the decade as the nation's bulging service sector slims down and experiences a rapid increase in productivity.
The Federal Reserve Board's 22.3 percent reduction of the discount rate in December--the largest cut on a proportional basis since the Great Depression--has led some investors to believe that an economic recovery is just months away. Lowering interest rates in a conventional recession usually infuses an ailing economy with strong doses of monetary medicine that stimulate consumer demand and reduce excess inventories relatively fast. This generally leads to turbocharged growth and an eventual pickup in employment. Joblessness during the 1981-82 recession peaked at 10.7 percent, for example, but within two years had declined by nearly one third, to 7.4 percent.
The current downturn is different. Many cash-strapped homeowners whose houses have fallen in value won't be able to take advantage of the refinancing bonanza promised by the Fed's rate cut. So far, unemployment remains lower than it was a decade ago, but this recession isn't over yet and the economy's glaring structural problems will stifle growth and new jobs.
The Fed's recent monetary move has also propelled the stock market to record highs over the past few weeks (story, Page 60). With interest rates so low, investors are flocking to equities with the hope of gaining higher returns on capital. Bullish buyers believe that the spate of corporate layoffs will generate strong earnings growth in coming quarters. But should corporate America, in search of short-term profits, continue to aggressively hack away at its work force, the strategy could backfire. If more and more people are discharged, consumer confidence will drop faster and demand for goods and services will dissipate further. The result: dramatically lower earnings.
Gripped by trouble. A group of analysts at the Jerome Levy Economics Institute outside New York City believes that the economy is currently experiencing a far worse fate. These experts assert that the United States is in the grips of a "contained depression" that is being driven by an excess of capital, rather than inventories. These capital excesses will take far longer to work off than the traditional inventory imbalances that have characterized previous post-World War II downturns. The Levy Institute suggests that the "contained depression" today would match the severity of the 1930s economic collapse, were it not for massive government spending and financial safeguards like deposit insurance. During the Depression, federal spending accounted for just 3 percent of GNP; today, public outlays represent about 25 percent. "Every night," says Hyman Minsky of the Levy Institute, "George Bush should light a candle for Franklin Roosevelt and say thank you for the FDIC."
Tumbling asset values and an over-supply of everything--from office buildings to shopping malls to automobile factories--are the clearest signs of economic danger, according to the Levy Institute. At the same time, the population growth and underlying demand that fueled investment in the decades following World War II have recently slowed. During the 1980s, American firms harnessed large amounts of debt in the face of this weak demand and invested in assets such as commercial real estate. In 1979, there were 7 square feet of retail space per person; today, that figure has ballooned to 16 square feet. Now that the speculative bubble has burst, the value of these assets has plummeted, and the financial institutions that made the loans are in jeopardy. Given the economy's excess capacity and debt, low interest rates may not entice firms to invest in the new factories and equipment that create jobs; and yet companies will need to invest in new technologies to remain competitive in the global economy. "Idle capacity will stay idle," says economist David Levy. "It doesn't matter what interest rates are, companies won't invest in expanding because they don't need to."
Too many wheels. Overcapacity is already having a negative impact on U.S. employment. Take the auto industry. The staggering 74,000 job cuts recently announced by GM are roughly equivalent to firing Chrysler's entire work force. And, with the lack of growth in motor-vehicle sales and the 7 million to 9 million units of overcapacity in the global auto industry, more than 650,000 industry jobs will have been lost between 1988 and 2000, according to University of Michigan economist Sean McAlinden.
Battered by technological shifts and a tidal wave of cheap Asian imports, computer makers were forced to reduce their payrolls--by 48,000 employees in the first three quarters of 1991. Even IBM, for example, once renowned for its no-layoff policy, plans to slice its work force by 20,000 positions over the next year--its second major cut in as many years.
And with the cold war over, the U.S. defense industry is shrinking as well. Defense-related industrial jobs have declined by 365,000 since 1987, and they will fall an additional 15 percent by 1995, according to Larry Korb of the Brookings Institution. McDonnell Douglas Corp., for instance, is expected to cut its payroll by as many as 7,000 employees over the next year and a half.
Manufacturing isn't the only sector that will suffer devastating employment losses in the decade ahead. Service industries, with the exception of health care, are also being ravaged. Retailing--hammered by too much debt, too many stores and too few customers--has shed a stunning 525,000 jobs since the downturn began. Sears, Roebuck & Co., a case in point, has sheared its work force by 33,000, or roughly 10 percent, since August 1990.
Banks on the brink. Debt-plagued financial services will also have to grapple with chronically high unemployment in the decade ahead. Nearly 115,000 jobs have already been eliminated in this industry over the past two years. Banking, in particular, is contracting as a result of overcapacity and multiplying bad loans. A recent study by the consulting firm of Towers Perrin projects that 100,000 banking jobs--or nearly 7 percent of the industry's total employment--will be lost in 1992 alone, as weakened financial institutions across the country are forced to consolidate. Texas is a grim harbinger of things to come: Between 1985 and 1991, the number of banks in the Lone Star State shrank from 1,515 to 1,142; in the process, 12 percent of the state's bank employees were let go.
Small business, an engine of growth during the recession of 1981-82, won't absorb America's unemployed legions during this downturn. With bank lending drying up, these energetic enterprises have been unable to secure the funds needed to expand. As a result, employment growth at small companies, many in the service sector, has been cut in half since 1988. Moreover, the level of small-business incorporations, which peaked at 700,000 in 1986, has fallen to 600,000. "The gains of the last decade have been lost from a startup point of view," says David Birch of Cognetics, a Massachusetts-based consulting firm.
State and local governments, which traditionally provide jobs in a recession, can't be counted on for help either. Employment growth in these deficit-ridden entities fell from an average annual rate of 2.2 percent to nearly zero in 1991. And since May, nearly 60,000 state and local jobs have been cut across the nation. "Work force reductions will be more severe in 1992 than they were last year," warns Brian Roherty of the National Association of State Budget Officers, "and projections for 1993 don't suggest any relief." In many cases, minorities will be hurt the most. In New York City, for example, which expects to eliminate 30,000 jobs over the next four years, nearly one third of all black workers are employed in government, compared with 15 percent of the city's white workers.
America's Great Compression will continue for the foreseeable future. Slow growth and persistently painful unemployment already envelop the nation--from depressed New England to the faltering manufacturing hubs of the Midwest and to California's deflated real-estate market. This travail will lead to a further erosion of living standards for the average citizen. Since 1980, the median family income for families with children has declined by $1,600 in real terms. And the net worth of U.S. households fell by about $890 billion in real terms between 1989 and 1990, the largest drop since 1947.
Middle-class professionals are particularly vulnerable to income cuts. Economist Lawrence Mishel points out that between 1982 and 1990, wages of professional male workers grew by 6 percent, while those of blue-collar men fell by 8 percent. But wages for college-educated workers declined in 1990, as many were forced to take jobs for which they were overqualified. And between 1989 and 1990, the nation's highest wage families saw their incomes drop further than any other group: The top quintile's income slid 3.3 percent after inflation compared with a 1.1 percent drop for the bottom quintile. "Middle managers are viewed as expendable," says Thomas Kochan, a labor economist at MIT's Sloan School of Management. "We may see the same kind of income losses for white-collar workers that we've seen for steel and auto workers who went through the manufacturing restructuring of the last decade." During that period, adds Kochan, unionized blue-collar workers who obtained new jobs after extended layoffs watched their incomes plummet by 20 to 30 percent from previous levels.
George Bush will have to confront this jarring new economic reality as he campaigns for re-election in 1992. It won't be easy, especially with the depressing data that continue to pour out. Last week, for example, the nation's purchasing managers reported that their index had fallen back to recessionary levels; the government also announced that construction spending dropped 0.8 percent in November, and auto makers issued yet another set of gut-wrenching sales figures. To ward off this bad news, Bush is considering using defense funds to help pay for increased domestic spending or tax cuts. But it will take much more than fiscal tinkering or Pacific barnstorming to persuade fearful American voters that their jobs are safe.
WHAT'S WRONG WITH THE ECONOMY America is plagued by excess capacity and excess debt. Neither problem will be worked out before the middle of the decade.
Since the 1960s, capacity utilization has steadily declined because there are too many factories and too few orders in the United States.
Capacity utilization, manufacturing 1948 82.5 pct. 1949 74.2 pct. 1950 82.8 pct. 1951 85.8 pct. 1952 85.4 pct. 1953 89.3 pct. 1954 80.1 pct. 1955 87.0 pct. 1956 86.1 pct. 1957 83.6 pct. 1958 75.0 pct. 1959 81.6 pct. 1960 80.1 pct. 1961 77.3 pct. 1962 81.4 pct. 1963 83.5 pct. 1964 85.7 pct. 1965 89.5 pct. 1966 91.1 pct. 1967 87.2 pct. 1968 87.2 pct. 1969 86.8 pct. 1970 79.7 pct. 1971 78.2 pct. 1972 83.7 pct. 1973 88.1 pct. 1974 83.8 pct. 1975 73.2 pct. 1976 78.5 pct. 1977 82.8 pct. 1978 85.1 pct. 1979 85.4 pct. 1980 80.3 pct. 1981 78.8 pct. 1982 72.8 pct. 1983 74.9 pct. 1984 80.4 pct. 1985 79.5 pct. 1986 79.0 pct. 1987 81.4 pct. 1988 83.9 pct. 1989 84.0 pct. 1990 82.3 pct. 1991 78.2 pct.
Private fixed investment for housing, commercial construction, plants and equipment has fallen to its lowest level since World War II.
Net private fixed investment as percentage of GNP (annual average) 1948 8.4 pct. 1949 6.7 pct. 1950 8.5 pct. 1951 6.9 pct. 1952 6.0 pct. 1953 6.4 pct. 1954 6.3 pct. 1955 7.3 pct. 1956 7.0 pct. 1957 6.3 pct. 1958 4.9 pct. 1959 6.0 pct. 1960 5.6 pct. 1961 5.0 pct. 1962 5.6 pct. 1963 5.9 pct. 1964 6.2 pct. 1965 6.9 pct. 1966 6.8 pct. 1967 5.9 pct. 1968 6.2 pct. 1969 6.4 pct. 1970 5.6 pct. 1971 6.1 pct. 1972 6.9 pct. 1973 7.4 pct. 1974 6.0 pct. 1975 4.0 pct. 1976 4.6 pct. 1977 6.1 pct. 1978 7.0 pct. 1979 7.0 pct. 1980 5.2 pct. 1981 4.7 pct. 1982 2.8 pct. 1983 3.3 pct. 1984 4.8 pct. 1985 4.8 pct. 1986 4.5 pct. 1987 4.1 pct. 1988 4.2 pct. 1989 3.6 pct. 1990 3.1 pct. 1991 1.8 pct.
Occupancy rates for commercial real estate are at the lowest levels since the Great Depression.
National office occupancy rates (annual average) 1924 90.2 pct. 1925 91.4 pct. 1926 90.7 pct. 1927 89.6 pct. 1928 88.1 pct. 1929 88.3 pct. 1930 86.8 pct. 1931 82.2 pct. 1932 76.9 pct. 1933 73.1 pct. 1934 72.9 pct. 1935 74.8 pct. 1936 78.0 pct. 1937 81.4 pct. 1938 82.0 pct. 1939 82.3 pct. 1940 83.1 pct. 1941 84.5 pct. 1942 87.1 pct. 1943 89.4 pct. 1944 93.4 pct. 1945 96.9 pct. 1946 99.3 pct. 1947 99.1 pct. 1948 98.9 pct. 1949 98.2 pct. 1950 97.4 pct. 1951 97.9 pct. 1952 98.1 pct. 1953 97.9 pct. 1954 97.1 pct. 1955 96.7 pct. 1956 96.8 pct. 1957 96.8 pct. 1958 96.0 pct. 1959 95.5 pct. 1960 95.4 pct. 1961 95.0 pct. 1962 93.9 pct. 1963 93.5 pct. 1964 92.0 pct. 1965 92.2 pct. 1966 92.6 pct. 1967 91.7 pct. 1968 92.9 pct. 1969 95.2 pct. 1970 93.2 pct. 1971 91.3 pct. 1972 87.6 pct. 1973 90.6 pct. 1974 89.0 pct. 1975 90.4 pct. 1976 89.5 pct. 1977 90.8 pct. 1978 94.1 pct. 1979 95.4 pct. 1980 94.9 pct. 1981 95.0 pct. 1982 92.2 pct. 1983 89.4 pct. 1984 85.7 pct. 1985 83.8 pct. 1986 82.4 pct. 1987 80.7 pct. 1988 81.7 pct. 1989 83.1 pct. 1990 81.8 pct. 1991 82.4 pct.
Corporations and households piled on record amounts of debt in the 1980s.
Nonfinancial debt as a percentage of GDP (annual average) 1959 135.2 pct. 1960 137.9 pct. 1961 140.1 pct. 1962 139.1 pct. 1963 140.9 pct. 1964 140.3 pct. 1965 138.9 pct. 1966 135.9 pct. 1967 136.5 pct. 1968 135.1 pct. 1969 134.9 pct. 1970 136.7 pct. 1971 136.7 pct. 1972 136.5 pct. 1973 135.9 pct. 1974 137.5 pct. 1975 137.2 pct. 1976 135.7 pct. 1977 135.7 pct. 1978 135.8 pct. 1979 136.9 pct. 1980 138.7 pct. 1981 136.2 pct. 1982 143.1 pct. 1983 146.3 pct. 1984 149.6 pct. 1985 158.9 pct. 1986 170.3 pct. 1987 177.0 pct. 1988 179.3 pct. 1989 181.7 pct. 1990 187.0 pct. 1991 189.9 pct.
USN&WR--Basic data: Building Owners and Managers Association, Int'l., Federal Reserve Board, The Jerome Levy Economics Institute, Merrill Lynch, Congressional Budget Office, U.S. Depts. of Labor and Commerce
HOW JOBS ARE AFFECTED Overall unemployment was worse in 1981-82, but this downturn represents the first time in recent history that white-collar workers have lost jobs in a recession.
More people entered the labor force during the last recession, which is one reason why the government's reported unemployment rate for this downturn has not jumped higher.
Employees on non-farm payrolls (July=100) 1990-91 1981-82 j 100.0 100.0 a 99.9 99.9 s 99.9 99.9 o 99.7 99.8 n 99.5 99.5 d 99.4 99.2 j 99.2 98.8 f 99.0 98.8 m 98.8 98.7 a 98.6 98.4 m 98.7 98.4 j 98.7 98.1 j 98.7 97.8 a 98.8 97.6 s 98.9 97.4 o 98.9 97.1 n 98.7 96.9
Civilian labor force (July=100) 1990-91 1981-82 j 100.0 100.0 a 100.0 100.2 s 100.2 99.8 o 100.1 100.4 n 100.0 100.6 d 100.4 100.3 j 99.9 100.5 f 100.3 100.8 m 100.5 100.9 a 100.8 101.2 m 100.4 101.7 j 100.7 101.4 j 100.4 101.6 a 100.2 101.8 s 100.7 102.0 o 100.7 102.0 n 100.4 102.3
Over 200,000 white-collar jobs have been lost since this recession began; during the downturns of 1973-74 and 1981-82, they increased by an average of 800,000.
Net change in employment
1973-74 1981-82 7/90-11/91 Blue collar -2177 thous. -2789 thous. -1117 thous. White collar 794 thous. 838 thous. -209 thous.
This recession is different from past downturns because many service-sector jobs, especially in retail and finance, are permanently disappearing.
Net change in employment
1973-74 1981-82 7/90-11/91 Retail 43 thous. 31 thous. -527 thous. Finance, Insurance and Real Estate 54 thous. 47 thous. -43 thous.
USN&WR--Basic data: Building Owners and Managers Association, Int'l., Federal Reserve Board, The Jerome Levy Economics Institute, Merrill Lynch, Congressional Budget Office, U.S. Depts. of Labor and Commerce
WHY THE STANDARD OF LIVING IS FALLING Families are watching their assets dwindle and incomes drop.
BEGTAB& The real net worth of households declined in 1990 by the greatest amount since 1947.
Real household net worth 1985 $15,460 bil. 1986 $16,338 bil. 1987 $16,836 bil. 1988 $17,358 bil. 1989 $18,412 bil. 1990 $17,522 bil.
By the end of 1992, family income will have dipped below 1980 levels.
Median income, families with children (1992 dollars before taxes) 1980 $38,900 1985 $37,100 1989 $38,300 1992 $37,300 (est.)
USN&WR--Basic data: Building Owners and Managers Association, Int'l., Federal Reserve Board, The Jerome Levy Economics Institute, Merrill Lynch, Congressional Budget Office, U.S. Depts. of Labor and Commerce
On the street. People haven't been forced to sell apples as they did during the Great Depression 60 years ago (above). But bankruptcies are approaching the levels of the 1930s. The retail closing (right) is another grim reminder of today's recession.
Out of luck. The Oklahoma dust bowl symbolized the plight of poor farmers in the 1930s (above). Today, agriculture isn't suffering nearly as much, but many desperate families have found themselves far from home and unable to make ends meet (left).
Statistical snafus
The false body count
The government's labor statistics dramatically understate the real pain and suffering that joblessness has brought to families across the nation since the recession began 17 months ago. Neighbors have been forced into early retirement, teenagers have given up hope of ever finding a job and have stopped looking, and part-time employees wish they could work a full 40-hour week. Yet none of these individuals is included in Washington's official unemployment rate.
Each month, the Department of Labor releases a report that contains information about jobs--who has them and who doesn't. The unemployment rate is extracted from that report. But this figure shows only the percentage of people searching want ads and sending resumes--those looking for jobs.
What the measure does not include are "discouraged workers," those people who don't have jobs and who have stopped looking for them, and the many part-time workers who want full-time positions. In November, about 7.6 million people fell into these two categories. When the government includes these citizens in the unemployment figures, the overall jobless rate rises from 6.8 percent to 10.1 percent. "The unemployment rate measures what it is supposed to measure," says Janet Norwood, just-retired commissioner of the Bureau of Labor Statistics. "But people err in believing that a single number will tell them everything they need to know about the state of employment in the economy. The unemployment rate alone cannot tell us what the welfare of the nation is."
Another factor that may pull down the unemployment numbers is the extremely slow growth in the U.S. labor force during the current recession. Since July 1990, the labor force has grown at just 0.4 percent, compared with 2.3 percent in the 1981-82 downturn and 2.7 percent during the 1973-75 recession. Norwood attributes today's slow labor-force growth to a decline in the percentage of the population that is "participating" in the labor force--those working or trying to find jobs.
If the labor force was growing at the same clip as in the 1981-82 recession, the current unemployment rate would jump to 11.1 percent. Using the identical statistical approach, the peak unemployment rate for the downturn of the early 1980s comes to 15.4 percent.
Bad numbers. Another problem that the government has in assessing the labor market is getting an accurate fix on state employment patterns. California, for example, revealed that it had lost 400,000 jobs in the first quarter of 1991, while the Bureau of Labor Statistics reported that just 50,000 positions had vanished. There was another disparity in New York, where the bureau and the state figures differed by 138,000 jobs in early 1991. Norwood recently told Congress that the bureau overcounted about 650,000 jobs nationally in the first quarter of 1991, although by the time this data divergence is straightened out, the bureau overcount may well reach more than 1 million.
Washington's statistical snafus obscure the real economic problems facing the nation. Unless data collection is improved, it will remain difficult to develop meaningful policy prescriptions.
The real unemployment rate
Civilian unemployment rate 6.8 pct. Adjustment for part-time workers 9.2 pct. Discouraged workers 10.1 pct. Slowing labor-force growth 11.1 pct.
USN&WR--Basic data: U.S. Dept. of Labor
This story appears in the January 13, 1992 print edition of U.S. News & World Report.