With profits tumbling 13.5% in 2001, could Corporate America have overlooked any costs to cut? How about the people who make head-count decisions to begin with? Unlike in past recessions, employment last year surged among the managers and execs who run companies, while employment contracted in nonmanagerial ranks, notes Stephen S. Roach, chief global economist at Morgan Stanley Dean Witter & Co. "I guess it's hard to wake up in the morning, look in the mirror and say, `You're next,"' he says, only half-jokingly.
Indeed, Bureau of Labor Statistics data shows that managerial employment rose by 2.9% in 2001, nearly triple the prior year's growth rate. Meanwhile, nonmanagerial employment fell 0.5%, with blue-collar workers taking the biggest hit with a decline of 2.0%. That stands in sharp contrast to 1990, the year the previous recession started, when both managerial and blue collar employment declined. And the increase has pushed the share of the total workforce held by managers to an all-time high of 15.3% of nonfarm employment.
Roach suspects that the increase in managerial jobs is a legacy of the Internet bubble. As companies added Net operations in the late 1990s, there was a growing belief that business had become more complex, requiring more management. Nowhere is this legacy more pronounced than in the service sector. The bulk of managerial hiring in 2001 occurred in service-related industries such as banking, consulting, securities, accounting, health care, education, and retail.
But Roach doesn't believe this management overhang can last. For the most part, the management structures put in place were geared to the high growth rates of the late 1990s. As earnings remain sluggish, Roach expects a managerial shakeout to begin this year or early the next. This could slow consumer consumption, according to Roach, given that managerial hiring accounted for the largest share of job growth the past three years. Although the economic recovery in the U.S. is still vulnerable to a shakeout, there are plenty of surprises on the positive side. Among these are personal tax refunds. Since early February, when tax season traditionally starts, taxpayers have received money back from the government at an unexpectedly rapid rate. According to economists at Goldman, Sachs & Co., tax refunds through Mar. 8 were up 26% over 2001 levels, which has helped hold up consumer spending.
There are several reasons for this. For one, companies are still adjusting their payroll systems to take President George W. Bush's tax cuts into account, notes Goldman economist John M. Youngdahl. While the lower tax rates took effect last July, some companies didn't adjust their withholding on time, which means workers gave too much to Uncle Sam last year. In addition, more people are filing tax returns electronically, which speeds up refunds.
Last year's weak economy has had an impact, too. Bonuses were lower, and sagging stock prices have left investors with lower capital-gains tax liabilities than they had last year. So if taxpayers withheld too much from their paychecks to offset expected stock market gains or big bonuses, they'd be getting money back from the Treasury.
Youngdahl expects high levels of tax refunds to increase personal income by about $3 billion per month. There are already signs that higher refunds are boosting the economy. Weekly chain-store sales have soared in recent weeks. "An upward explosion in tax refunds this year is one reason why consumer spending has held up nicely," Youngdahl says. The Federal Reserve is rethinking how it protects the financial system from a meltdown in light of its experiences in the chaotic days after September 11. Fed loans to banks through its discount window shot up to $45 billion on Sept. 12, from a daily average of around $200 million. Those loans were secured by collateral posted by the banks.
But the newly released February issue of the Federal Reserve Bulletin reveals that in the two weeks after the terrorist attacks, the Fed was making a large volume of uncollateralized loans to banks as well, reaching a peak of $150 billion on Sept. 14, a record level and more than 60% higher than usual. The unsecured loans came in the form of so-called "daylight overdrafts." Typically, banks use these overdrafts when they must pay money out in the morning and don't expect receipts until the afternoon. They carry an interest rate of just 0.36%--that's $10 a day on $1 million--and they are expected to be repaid by the end of the business day.
Because daylight overdrafts are unsecured, they leave the Fed exposed to default risk. Requiring collateral for daylight overdrafts would better protect the Fed--and, indirectly, taxpayers. Fed staffers found that more than 98% of eligible banks would have no trouble posting full collateral. But they found that a collateral requirement would be an issue for some large banks that are among the heaviest users of such overdrafts. "These institutions could find the level of their access to daylight credit dramatically reduced or could incur additional costs to acquire assets for collateral purposes," says the article.
The American Bankers Association says it would oppose any attempt to require collateral for daylight overdrafts, and the Fed hasn't proposed doing so. Even if the Fed did require collateral for intraday loans, it could waive the rules in an emergency.