Jobs: How Long Can Services Pick Up the Slack?

By Michelle Conlin in New York and Joseph Weber in Chicago, with A.T. Palmer, Liz Garone in San Francisco, and Bureau Reports
BusinessWeek: February 19, 2001

Beaco Griffin, a 55-year-old factory worker in Chicago who has been out of work since his paper company closed in November, doesn't relish the idea of sitting behind a desk. And yet, with layoffs coming fast and furious in manufacturing, he may soon find himself boning up on computers in a city-sponsored training program. He figures he'll need the skills, whether he winds up using them in a small business or office. "That's scary because I don't know zip about computers," says Griffin. "But I need a job."

As the economic slowdown continues to wrack the nation's factories, growing numbers of workers are finding themselves out of work. Indeed, as the drumbeat of layoffs quickens with each passing week, it's clear that manufacturing is in its deepest recession since the early 1990s; in January, the sector shed 65,000 jobs alone, the biggest drop since August. And the cuts keep piling up: DaimlerChrysler will slash 26,000, and even mighty General Electric may slice its payroll by as much as 75,000.

PINK SLIPS. Nor are jobs in the service or high-tech sectors immune. The closing of retailer Montgomery Ward has cost 28,000 jobs alone, while Cisco Systems Inc. and others in Silicon Valley have scaled back as troubles mount in Techland. And don't even mention the pink slips piling up at the dot-coms. Indeed, in recent weeks, even such New Economy icons as AOL Time Warner Inc. and Inc. have cut jobs.

Given the headlines, you might expect that job growth has screeched to a halt. But for now, the market has only softened slightly. The jobless rate has barely nudged from its record lows, moving from 4% in December to just 4.2% in January. Indeed, in the service sectors experiencing the most intense expansion--construction, health care, consulting, engineering, finance, and education--the fight for talent continues. "Services are on fire," says Richard Yamarone, director of research at Argus Research Co. in New York. "We're still at full-employment, so consumers have money."

The question, of course, is: Will it last? So far, the service sector appears to be a powerful sponge, sopping up many of the newly unemployed nearly as fast as they lose their jobs. Manufacturing, which now accounts for less than 18% of gross domestic product, has lost 254,000 jobs since June, says the Labor Dept. But during the same period, services jumped more than expected, creating 129,000 jobs in January and a robust 871,000 since June. Says Wayne D. Angell, chief economist for Bear Stearns & Co. and a former Federal Reserve governor: "It takes quite a while before people say, `Okay, I'm not going to eat out in restaurants, I'm not going to travel."'

That's true now, but may not be the case for much longer unless the overall economy gets some fresh legs. Among the trouble signs: The National Association of Purchasing Management's nonfactory business index, which tracks activity in service businesses, has plunged 11 percentage points in January to its lowest level since the survey began in July, 1997. Some see that as a sign that services are starting to take a hit. "The whole economy is slowing, and that should eventually communicate to services," says Yale University economist Robert J. Shiller. Moreover, in the Labor Dept.'s productivity report for the fourth quarter, hours worked fell 1.1% as companies appear to have sharply slashed the use of freelancers and other self-employed workers. That may signal that even more painful cutting of payrolls may not be far off.

Clearly, the froth is out of the labor market. The specter of B-school grads holding up corporations for exorbitant packages now seems like ancient history. "Companies are not so pressed to come up with extras anymore," says Nancy Agatiello, founder of Prism Group, a technology placement firm. "For a while, hiring managers felt, without even thinking a candidate was that great, that they had to put up a great package."

Yet for many employers, the need for skilled workers remains intense, and surprising pockets of pent-up demand exist. For example, nurses are getting $2,500 signing bonuses as demand for skilled health-care workers stays strong. Burger King managers are being handed the keys to BMWs as bonuses. And hotel chains such as Marriott International and Hyatt Corp. are still competing fiercely across the board for room maids, managers, and executives.

Nor has there been much slowdown in such white-collar areas as consulting or financial services. Firms such as Accenture (formerly Andersen Consulting) and IBM Global Services are planning to add 20,000 consultants each this year. As for the 9,000 people who will likely lose their jobs on Wall Street this year, analysts predict many will be hired quickly, as banks and securities firms such as Deutsche Bank and Lehman Brothers Inc. build up their own ranks.

"LESS ARROGANT." The slowdown is also providing a chance for many companies to hire. It's "very positive for our industry," says Seritta K. White, CEO and president of Marin County (Calif.)-based S.K. White Consulting Inc., which places tech workers in temporary posts. "Candidates are becoming less arrogant, less haughty, and more flexible."

Indeed, all across Silicon Valley there is a collective sigh of relief among employers who can now fill jobs. Sun Microsystems Inc., for example, has slowed hiring but will still offer jobs to hundreds of salespeople and researchers this year. "We're definitely getting more calls from candidates as the market loosens up," says Prism's Agatiello. Now begins the great waiting game: When, if at all, will the benefits of the looser labor market give way to the same painful cuts in the service sector that have coursed through manufacturing?

2004 Business Week

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