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Speed of Job Losses Has a Silver Lining

Source: Wall St. Journal

Posted on 10 Aug 2009

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Economists say that the quick rate at which businesses were forced to slash jobs during the recession will likely come with an upside: Workers will need to be hired back just as quickly as the economy improves.

So deep have companies cut jobs that Friday's employment report, which showed that the U.S. economy lost a quarter-million jobs in July, was seen as a relief. Since the recession began in December 2007, U.S. payrolls have fallen by 6.7 million, according to the Labor Department. That's a 4.8% decline, a level not seen since the late 1940s.

"Firms were unusually aggressive in cutting costs and cutting employment," said James O'Sullivan, an economist with UBS. "The flip side of that remains to be seen, but it could mean that companies will be quicker to bring back people because they were more aggressive about getting rid of them."

Businesses say they are running lean. Philadelphia staffing and outsourcing company CDI Corp. has seen demand for its services fall sharply in response to the recession. Its engineering services business, for example, has seen a 22% drop-off, said Chief Executive Roger Ballou. But the company has cut staff deeply enough that it doesn't have many idle hands, and Ballou said that's true at CDI's customers as well.

"I'm unaware of any firm out there today that has lots and lots of people sitting on the bench, waiting for business to come back," said Ballou. As a result, he thinks jobs will come back more quickly as the economy recovers than they did in 2001.

Even as more companies begin to hire as the economy recovers, it could take years before payrolls reach their prerecession level. With Americans spending more cautiously in response to the massive losses in wealth associated with this recession, some jobs may simply never come back.

"We are going through an important transition in the U.S. economy away from consumer discretionary and housing expenditures towards more exports and research and development," said Northern Trust economist Paul Kasriel. "It's going to take a lot of time for workers to retrain and get skills in those areas."

Moreover, with manufacturers continuing to make strides at wringing more production out of fewer workers, even as demand picks up, they may be able to hold off on hiring. Manufacturers began cutting workers in 1998, long before the 2001 recession started, and they kept cutting them through the subsequent recovery and into the current downturn.

And a quick labor-market recovery would be a break from what has happened in recent downturns. After the brief 2001 recession ended, the economy continued to shed jobs for nearly two years, and after the 1990-91 recession, jobs growth sputtered. The two experiences led economists to conclude that there had been a shift in the behavior of the job market, which in the past recovered quickly after recessions.

That said, one thing different about this recession -- and one more reason the job market may come back more quickly than in the downturns of 2001 and 1990-91 -- is that so many of the job losses have been at the service-related companies that have come to dominate U.S employment. Since the recession began, 3.3 million service-sector jobs have been lost, a 2.9% decline that is the largest in data going back to 1939. In comparison, the previous two recessions each saw service-sector jobs fall by 0.5%. Many service-related firms may have a more pressing need than manufacturers to rehire workers as demand comes back.

The biggest reason jobs overall might bounce back quicker from this downturn than the past two recessions, said Comerica Bank economist Dana Johnson, is that the economy looks likely to see a much bigger bounce as it recovers. Gross domestic product -- the value of all goods and services produced by the economy -- has fallen by 3.9% since economic output peaked last year, marking the steepest decline since the end of World War II. In contrast, the 2001 and 1990-91 recessions were among the shallowest on record.

History says that given the depth of the downturn, GDP should grow at a 6% to 8% rate over the next year, according to Johnson. But because of the financial stress that has come with this recession, he expects it will grow at a 4% rate.

"What people forget is that a deeper recession has consequences," Johnson said. "There is a considerable relationship between the depth of recessions and subsequent recoveries."