Moderation in all things, counseled the Roman author Terence. But that's a lesson the U.S. economy hasn't learned very well. In the 1980s, it was an excess of government spending, private debts, and commercial real estate. For the 1990s, the obsession is cost-cutting.
More than two years into the recovery, many companies--both ailing and healthy--are still slashing payrolls and squeezing benefits to lift profits. And while such nips and tucks enhance individual corporations and should eventually lift productivity and competitiveness, the immediate payoff is not attractive to the economy as a whole.
The problem: Corporate America's gain is Household America's pain. While companies have done a fine job reining in labor costs, workers are left with less money to spend in an economy that is largely driven by consumer purchases.
Today's widespread layoffs are cutting more than household buying power. Announcements such as IBM's July 27 disclosure that it will release 35,000 more workers by the end of 1994 also raise job anxieties among consumers who aren't Big Blue employees. The drop in consumer confidence, which continued in July, means some shoppers are postponing their buying plans, further undercutting domestic demand.
Delayed buying plans are one reason why the factory sector has been a disappointment, but that could be changing. New orders taken by durable-goods manufacturers increased a solid 3.8% in June after a string of three monthly declines (chart). Demand for aircraft accounted for two-thirds of the increase, but orders for electrical machinery and primary metals also rose.
But even with the June pickup, manufacturers won't be running at full speed soon. Orders for the entire second quarter declined at a 7.4% annual rate, and the order backlog fell 0.8% in June, the fourth drop in a row. A full factory turnaround depends on consumers maintaining their sturdy second-quarter pace of spending.
That's why the improvement in consumer fundamentals such as jobs and income is so crucial to the outlook. Despite corporate belt-tightening, the U.S. economy has added nearly 1 million jobs so far this year. Moreover, wage growth is finally showing some upward tilt. Both trends will help consumer spending in the second half.
The Labor Dept.'s employment-cost index shows the progress that companies have made in controlling their costs in recent years, but it also shows that the slowdown in labor costs is probably over.
Total employment costs for civilian workers--including both wages and benefits--rose 0.9% in the second quarter, or 3.6% over the past 12 months. That's about the same pace as in each of the four previous quarters. Prior to that leveling off, the annual growth rate of labor costs had been in a steady decline since hitting a peak of 5.4% three years ago.
The second-quarter breakdown shows that wages rose 2.8% from a year ago. That was a shade better than the first-quarter rise of 2.7%, which was up from the 2.6% yearly pace in the fourth quarter of 1992. As small as the advances are, yearly wage growth has not accelerated for two straight quarters since early 1989. Benefits were up 5.5% from a year ago. That's still a rapid pace, but it's well below the 7.4% growth rate in early 1990.
Even though wage growth has stabilized, continued corporate downsizing is evident in the latest cost trends. Middle management is still getting hit hard by cutbacks. So it's not surprising that compensation of white-collar workers has been growing more slowly than that of blue-collar professions since 1992. In the second quarter, employment costs for white-collar positions rose 3.6%, below the 3.8% for blue-collar jobs (chart).
Manufacturing costs were up a large 4.4% in the year ended in June, but the rise obscures the effects from downsizing. Factory wages rose by only 2.9% during the past year. That's down from the 3.5% increase of a year earlier, and the pace reflects shrinking payrolls as well as smaller wage gains.
Factory raises may get even punier. The government's latest survey of major collective-bargaining settlements showed that all contracts negotiated in the second quarter provide for annual wage increases of 2.7% over the life of the contract. But for manufacturing, unions were able to win pay raises averaging only 1.5%.
So what caused the strong advance in factory compensation? Benefits. They jumped 7.1% over the past year, up from 6% in June, 1992. Indeed, ever-swelling benefits is the toughest cost-cutting problem for all companies.
The proportion of all compensation devoted to benefits rose sharply in the 1960s and 1970s and has crept up ever since. In 1987, benefits accounted for 26.8% of labor costs. For 1993, that share is up to 28.7%.
The increasing share of benefits explains the rising use of temporary workers, because temps needn't be paid benefits. But this trend also contributes to consumers' insecurity about jobs.
That uncertainty, along with the unknowns of the proposed tax hikes in the Clinton Administration's budget plan, has been damaging to the consumer's psyche. However, there is a big divergence between how people say they feel and how they spend their money.
Consumers continued to lose faith in the future in July, according to the Conference Board. Its index of consumer confidence fell for the third month in a row, dipping to 57.7, from 58.6 in June. The index has fallen 26% from its post-election high in December (chart).
The board says jobs remain the greatest concern. In July, nearly 27% of those surveyed now fear that there will be fewer jobs during the next six months. That's up from 23% in June, and it's the most pessimistic reading in 16 months.
However, the latest survey reveals that households are a bit schizophrenic. While they continue to worry about the future, their assessment of current conditions is on a rising trend. The expectations component of confidence fell in July, but the reading for the present situation rose. In fact, since December, the expectations index has dropped 37%, while the present-situation index has increased by 17%.
Moreover, the drop in confidence last quarter is out of sync with the second-quarter pickup in consumer spending. Real outlays for goods and services rose at an annual rate of about 3%, and retail buying in July is off to a good start. Sales at department and chain stores rose 2.4% during the first three weeks of July compared with June, according to Johnson Redbook Service.
Consumer spending in the second half should also get a lift from the renewed strength in housing. Despite all the household pessimism over jobs and taxes, the cheapest mortgage costs in more than two decades are keeping home buying on an upward, if wobbly, trend.
The resale market clearly shows improvement. Sales of existing homes rose 1.9% in June, to an annual rate of 3.69 million. The June increase was the third jump in a row. In addition to the lift from low rates, the National Association of Realtors says that sellers are pricing their homes more realistically now. June sales were especially strong in the Northeast.
Sales of new homes also should show more life this summer. Builders were more enthusiastic in July, as 41% of those surveyed by the National Association of Home Builders called market conditions "good to excellent" (chart). That's the best reading in four months.
To be sure, cost-cutting mania has contributed to this recovery's historically weak performance. But it's the unusually sluggish pace of demand that has generated the push to tighten corporate belts. As demand continues to pick up--at least gradually--the need for further cutting will ease off. In fact, given the significantly faster pace of job growth in the first half of 1993, we may have reached that point already.