Ready to Say "Help Wanted"?

Surging demand should spur a second-half spike in hiring

In almost every respect, recent news on the economy has been the best in years. So where are the jobs? The unexpected loss of 93,000 payroll slots in August, on top of the 49,000 drop in July, was a shocker, especially in an economy that is showing signs of picking up powerfully in the third quarter.

Take heart, though. The second half is shaping up to be a whole new ball game. The breadth of the good news -- from strong back-to-school shopping to the rallying stock market to a long-awaited pickup in capital spending -- indicates that the economy is set to motor into 2004. This sustained surge in overall demand is why businesses will have no choice but to hang out "Help Wanted" signs soon. "Recent strength suggests that August's drop in payrolls will be much more than reversed by year's end," says John Lonski, chief economist at Moody's Investors Service (MCO )

What's changed? To date, the major drag on new hiring has been sluggish growth. Since the recession ended in late-2001, output has been rising at an annual rate of just 2.6% -- too anemic to offset the jobs lost to efficiency gains, more outsourcing, and greater use of temps. But now, as the recovery broadens and reanimates still-dormant areas of the economy, growth in the second half is likely to hit 4% to 5%. That's just the sort of spurt Corporate America needs to start hiring again.

It won't become a jobs bonanza, though, at least not before yearend. This quarter, companies are still wringing every bit of productivity they can from their existing workforces. Many economists are expecting the second quarter's stellar 6.8% productivity advance to be repeated in the third. These huge leaps will moderate, however, since efficiency always spikes up in the early stages of an upturn as companies start to hike output without hiring new workers. But once demand really takes off, companies have to bring on new staff.

In fact, productivity gains are key to the economy's rejuvenation and more jobs. Until recently, productivity growth has been blamed for the paradoxical mix of growth and job losses. Now, with growth accelerating smartly, productivity gains should help both output and employment grow. "The business sector's efficiency drive is the cure for -- not the cause of -- the economy's ills," says John Lipskey, chief economist at J.P. Morgan Chase (JPM ) Co.

Here's how the productivity payoff is starting to show for both businesses and their staff: Third-quarter profits are likely to be strong. If so, businesses will finally have both the funds and the inclination to invest in new gear, software, and buildings. Capital spending is growing even faster this quarter than the second quarter's solid 8% pace, a three-year high. Given the historically tight correlation between capital outlays and hiring, the signs look clear that job growth will soon reappear. On the consumer side, productivity gains have helped businesses lift the pay of existing workers as personal incomes are boosted by tax cuts and the spare cash liberated by the slew of mortgage refinancings earlier this year. All this is driving up demand -- which in turn leads to new jobs.

This chain reaction is beginning to become evident around the country. In New York, the Securities Industry Assn. thinks it's possible for staffing by its members to grow 4% by yearend, regaining the record head count of 837,000 set in 2000. Medical-device maker Boston Scientific (BSX ) Corp. plans to add 1,400 new slots this year. And defense giant Raytheon (RTN ) Co. in Lexington, Mass., expects to hire as many as 3,500 workers this year, up some 25% from last year's additions. And among small businesses, hiring intentions in August bounced up to the highest level in a year, says the National Federation of Independent Business.

Even executives in the long-stalled tech industry are beginning to look for new staff. "I'm optimistic about tech hiring and investment," says Michael Jordan, CEO of Electronic Data Systems (EDS ) Corp., the Plano (Tex.) information-technology services company. In Vernon Hills, Ill., computer reseller CDW (CDWC ) Corp. recently announced that it will lift hiring 11% by adding 150 workers in the second half, and it's set to add more in 2004. Genentech (DNA ) Inc., the San Francisco-based biotech leader, has hired 1,090 people and is looking to add 200 more by yearend.

This represents a much different attitude for American businesses from that of a few months ago, but the enthusiasm is still spotty. "We expect pretty good growth," says Gene Hodges, president of Network Associates (NET ) Inc. in Santa Clara, Calif., a maker of antivirus software. "But we have to hold expenses." And while temp employment -- a reliable predictor of future full-time employment -- has risen for four months in a row, Jeffrey Joerres, CEO of Milwaukee-based Manpower (MAN ) Inc., the nation's largest temp firm, says: "I'm more confident now than two months ago, but I'm still on guard."

Companies can afford to be cautious in the early stages of growth because it's easier than ever for them to grow without adding staff. Unlike labor markets just a decade or so ago, companies can boost output first by outsourcing or turning to temp workers or by pumping up productivity with new technology. Only when growth looks like a sure thing are they likely to add full-time, permanent staff. But with demand now getting stronger, some of that caution will begin to fade.

Of course, new jobs may not be coming back anytime soon in the hardest-hit corners of the economy. Some companies, especially in manufacturing, are still concentrating on cost-cutting rather than expansion. On Sept. 10, International Paper Co. in Stamford, Conn., said it will shed 3,000 workers, about 3% of its workforce, by the end of next year as part of its effort to save $1.5 billion. The same day, privately held Levi Strauss & Co. announced that it will trim 650 jobs, or 5% of its 12,400-strong staff. And one-time highflier 3Com Corp., the Marlborough (Mass.) maker of telecom and data gear, announced it will axe a third of its employees, or 1,000 workers.

Still, given how lean Corporate America has become, even struggling companies may be forced to hire, not fire, if they want to grow again. Troubled Qwest Communications International (Q ) Inc. announced last month that it's adding 500 more service reps in response to its dead-last ranking in customer service, as reported by J.D. Power & Associates Inc. And some manufacturers are finally seeing a long-awaited pick up in demand. In Joplin, Mo., Able Manufacturing & Assembly, a plastic- and metal-parts maker, has started hiring. As part of a new strategy, the company is doing more assembly work for its customers. CEO James Schwarz is so used to cutting jobs that adding workers feels strange. "It's kind of different," he says.

In its brief 18-month life, this recovery has been buffeted by all sorts of headwinds, from corporate scandals to war to volatile fuel prices. But the lack of jobs has been a constant bane. Now, that's set to change. All the important pieces -- including stimulative government policy and accelerating demand -- are finally in place to turn this jobless recovery into an upturn that creates more paychecks than pink slips.

By James C. Cooper and Kathleen Madigan in New York, with Robert Berner and Roger Crockett in Chicago, Faith Arner in Boston, Christopher Palmeri and Arlene Weintraub in Los Angeles, and bureau reports

    Before it's here, it's on the Bloomberg Terminal.