Waiting, Wondering, Worrying

What if 10% unemployment is the new normal?

Whether or not today’s high rate of unemployment is being bolstered by a rising floor of “natural unemployment,” CFOs know that the bleak jobs picture has a direct bearing on demand for their companies’ goods and services. In the most recent Duke University/CFO Magazine Global Business Outlook Survey (see “More Trouble Ahead?” October), half of all respondents said that current company profits, which remain strong, can be maintained for only another six months by hewing to the usual cost-cutting measures.

In other words, the usual recession-survival strategies are pretty much played out.

“We need some breakthrough innovation to stimulate the economy,” warns Mark White, CFO of SAP North America, a $5 billion arm of German software giant SAP AG. “Otherwise, we’re going to be stuck with unemployment in the 9% to 10% range, and I think that will be the new normal. In a strong economy, it may dip below 8%, but the days of 5.5% to 6% unemployment are behind us.”

If White is correct, this will usher in a new era of uncertainty for a country whose economy is highly dependent upon consumer spending and the strong job market that underpins such spending.

“If America continues to experience a jobless recovery without a corresponding increase in consumer spending, it probably means that we are achieving GDP improvements as a result of government spending and exports,” says Gregory Ray, CFO of Heritage–Crystal Clean Inc., a $100 million–plus parts-cleaning and waste-services company in Elgin, Illinois. “Both of these factors are unlikely to remain steady and positive for a long period of time. As a result, the recovery is likely to be volatile.”

The Rudolphe/Libbe Cos., a $280 million construction company based in Walbridge, Ohio, wouldn’t like that. “It doesn’t bode well for us, because it would mean there would be no real need for additional commercial and retail space,” says Robert Pruger, the company’s CFO and treasurer. Rudolphe/Libbe currently employs about 800 full-time-equivalent workers, he says, down from about 950 when the economy was booming. And even though it recently won a contract to build a 290,000-square-foot casino in Toledo, Ohio, it plans no permanent hiring right now. “We don’t know whether this [contract] is the bridge to sunshine,” he says, “or the bridge to nowhere.”

Recapturing Our Manufacturing Mojo

Like millions of other Americans, many CFOs worry that the United States won’t be able to create the new middle-class jobs it needs unless it is able to reestablish its role as a manufacturing power. But they fret that the forces that have conspired to diminish the country’s manufacturing prowess — cheap foreign labor, global supply chains, lax trade laws, and an uncompetitive corporate income tax system — have become too entrenched to be reversed anytime soon, especially given the acrimonious political tone in Washington.

“This is a path we’ve been on for the past three decades,” says Dean Baker, co-director and economist at the Center for Economic Policy and Research, a Washington, D.C., think tank. “You had this virtuous circle after World War II where productivity growth translated into wage growth, which led to more consumption, which meant business had to invest more to meet demand, which led to more productivity growth, and so on,” he says.

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