Recovery for Whom?

By GEORGE J. CHURCH

"A rising tide lifts all the boats."

-- John F. Kennedy, 1963

"This time it hasn't. The tide of the 1990s is different."

-- Stephen Roach, economist at the investment firm of Morgan Stanley, 1994

Kennedy's belief that a growing economy helps everybody to a more abundant life has been gospel for three decades. But Roach's opinion better describes today's reality: the closer one looks at the three-year-old recovery, the more it appears to be unlike any in recent memory. It is a split-level surge in which mass layoffs are continuing side by side with new hiring and heavy overtime; high-income people are making more money, while many others are working at worse jobs for lower wages than a few years ago and still others have seen pay raises, if any, fall behind even today's slow (2.5%) pace of inflation.

True, the people still hurting are a minority. A very large minority, though. Recent national polls show as many as 40% of those queried can see no sign of a recovery in their own finances. They think the nation remains in a recession; a few even say depression.

It is an opinion not lost on President Clinton, who well remembers that he was elected in 1992 primarily because he promised to make life better for the average citizen. Publicly, the President quotes the belief of some eminent economists "that our economy in its fundamentals has the best prospects it's had in two to three decades." But to aides he expressed frustration recently that "this appears to be a recovery for investors," not for the man and woman in the street, as a White House official put it. What to do, though? Clinton's aides disagree even on whether to express displeasure with the Federal Reserve's widely reported plan to raise interest rates again in order to head off any revival of inflation. Some aides even think the recovery could use a wee bit of slowing; slightly less growth in 1995 might make for a faster advance in the re-election year of 1996.

In any case, it is difficult to see much the Administration could do quickly to overcome the fundamental trends -- primarily the economy's wrenching readjustment to sharper foreign competition -- that are making the recovery so lopsided. Some clues to just how lopsided it is:

Caterpillar Inc. is one of the big corporate comeback stories: after slashing its work force from 60,558 in 1988 to 50,749 by the close of 1993, the company has got its costs down and its productivity up and is doing its first rehiring in five years. But Sandy Koicuba, 44, does not feel she is making any comeback -- even though she is one of those rehired. In late 1992 she was laid off as a materials specialist at the York, Pennsylvania, manufacturing plant; she has been recalled to pack materials in a warehouse across the street. Her wage: $9.10 an hour, vs. $17 an hour in her old job -- and she gets only one fringe benefit, inadequate major medical insurance. "I work 60 hours a week, and I still can't make it," she says. "I gross $1,400 a month and take home $1,000 -- and my mortgage is $600 a month. I've been to every bank and mortgage company to refinance. I can't do it because I don't have the money coming in. My friends have taken up a collection to pay my doctor bills. I don't go shopping for clothes; my jeans have holes in them."

Atlanta led all major cities in job growth last year. That did not help Tim Monteith, 37, who was laid off three years ago when the photo-finishing company he served as a marketing manager moved to North Carolina. "I read the classifieds and talk to friends and network," he reports, but he has been able to find only a string of temporary or part-time jobs. Having exhausted his savings accounts and a 401(k) pension account from his former employer, Monteith has been living on credit, and desperate to do something. So he turned to an old hobby: making costumes. Now he can be found on Atlanta street corners in outrageous getups -- including one that has Marilyn Monroe doing handstands -- to plug the business of such clients as a photo-finishing lab. That job hardly makes good use of his education: Monteith has both a bachelor's degree in biochemistry and an M.B.A. from Memphis State University.

Cathy Caniglia, 29, just returned to her job selling computer software in Houston after giving birth to her first child, a son; her husband Steve has been continuously employed as a stage technician. But their combined income has failed to keep pace with living costs. The couple sets aside 10% of Steve's paycheck in a savings account, but they find themselves dipping into the account constantly just to cover day-to-day expenses such as car payments. They must do this at the worst possible time: a mediocre insurance policy failed to cover $3,500 in bills for Cathy's hospital stay that the couple will somehow have to pay out of earnings.

At the cavernous Costco Warehouse bargain store in Lawrence, on Long Island in New York, Janet Lee, 52, scowls as her daughter, a college student, picks up and hopefully eyes a box of barbecued pork ribs. "Put that back!" Janet orders; she cannot see how she and her husband James, 58, can afford it. James delivers heating oil, but his $30,000-a-year salary has not been increased in two years, and "prices keep going up," says Janet. On top of that, certificates of deposit she bought initially at an interest yield of 10% are now paying only 2.5%, and the Lees may soon have to pay higher fees when they write checks: Chemical Bank will soon require depositors to maintain minimums of $6,000 in combined accounts or $3,000 in checking accounts alone to escape monthly and per-check fees. Says Janet: "I don't know anyone who can do that. Donald and Marla ((Trump)) maybe." Overall, she says, "I haven't noticed any recovery. Who's getting the profits? It's the bosses."

Some bosses, however, are not doing well either. Jeffrey Culver, a dentist in Berkeley, California, figures he needs "about 20 new patients a month to stay healthy, but I've been in the 15-to-17 range." And older patients keep putting off any expensive dentistry. Culver has restructured his pension plan, taken less vacation and frozen the salaries of his six employees. Says he: "I used to feel the salaries I offered were at the upper level, but now I can't maintain that. ((His employees)) are going to have to be happy at the second tier."

Such tales, of course, are not the whole story or even most of it. Every week brings a mixture of good and bad economic news, and last week was no exception. New claims for unemployment compensation jumped (bad), and so did business inventories (also bad). But sales rose even faster (good), and Ford Motor raised its dividend 12.5%, the first increase since 1989 (especially good since it indicates that Ford's directors expect the recovery to keep rolling).

In general, growth is slowing from the unsustainable 7% annual rate the economy hit at the end of 1993, but output of goods and services this year is widely expected to rise at least 3%. That is considered a sustainable rate that can continue to reduce unemployment -- which has fallen from a peak of 7.7% to 6.5%-without reigniting inflation. The most important dissent comes from the Federal Reserve Board, whose governors appear to think the economy right at the moment is growing a bit too fast. If the Fed does raise interest rates again soon, it will be to keep easy credit from fueling an overly rapid advance.

Yet the overall figures mask a crazy quilt of variations. Geographically, the picture varies not just by regions but by neighboring states or even within states. In New England, Massachusetts and New Hampshire are growing strongly, but Connecticut has been knocked virtually prostrate by cutbacks in its three main industries: defense, shipbuilding and insurance. In Texas the Rio Grande Valley, for decades the poor stepchild of the economy, is flourishing because of trade with neighboring Mexico. But other parts of the state are troubled by defense cutbacks. Texas Instruments, after slashing worldwide employment from 70,000 in 1990 to 59,500 today, is hiring people to fill orders for semiconductors -- but simultaneously laying off workers in its defense business.

In California the agricultural Central Valley is doing fine, but the Los Angeles area is barely beginning to steady after a deep slump. In Florida, Bob Dickinson, president of Carnival Cruise Lines, happily reports that advanced bookings for spring and summer travel are up 30% from a year ago. But Dick Holmes, a retired autoworker living in St. Petersburg, and his wife Glady find their earnings on CDs and savings accounts barely keeping up with inflation. Says Holmes: "We've kind of fallen in love with Taco Bell. We go there instead of the Olive Garden or Steak and Ale, which have all raised their prices."

The strongest crosscurrents, however, cut across the whole economy. "Americans have to cope with job change on a scale never before seen in this country," says Secretary of Labor Robert Reich. The economy, in fact, has accomplished the weird feat of combining a fairly brisk pace of job creation with a record rate of layoffs. Reich notes that job creation for the past six months has averaged 200,000 a month. But the increase over the past three years is about a third below the pace of earlier recoveries. Much worse, Challenger, Gray & Christmas, a Chicago-based outplacement firm, counted 615,000 layoffs announced by corporations in 1993 -- a monthly rate actually double the figure for 1990, the year the recent recession began. The count rose further, to 193,000 pink slips, in the first three months of this year, up 13% from early 1993.

The layoffs, of course, reflect primarily the downsizing mania of corporations feeling the lash of foreign competition. Their drive to cut costs and raise productivity has other discomforting results too. Companies are raising sales and production largely by working their remaining employees longer hours or at a faster pace. Morgan Stanley figures that 55% of the gain in output during the early stages of past recoveries came from increased productivity -- but for the first three years of this expansion the number is 90%.

Another way to cut costs is to replace laid-off permanent workers with temporary or part-time employees, who usually draw only wages, not fringe benefits. Some 16% of the 2.2 million jobs the economy has added in the most recent 12 months have been for temps. In March, 456,000 people found new jobs, the most for any month in more than six years -- but no fewer than 70% of them were part-time positions.

Even many of the new full-time positions have been relatively low-paid. As a result of all these trends, says Laura D'Andrea Tyson, chairwoman of Clinton's Council of Economic Advisers, "average earnings have barely increased in real terms" -- that is, discounted for inflation. In fact, there was no rise whatever in real average hourly earnings last year.

The cost cutting has its good side: it has held inflation in check. U.S. industry's labor costs per unit of output, a major factor determining the pace of price increases, actually fell at an annual rate of 3.2% in the last three months of 1993, causing some economists to scoff at the Federal Reserve's fears about a revival of inflation. ("What inflation?" Clinton growled to aides late last week.) meeting.) The Fed is on firmer ground, however, in its reported belief that too much of the recent economic growth has been fueled by cheap credit. Unable to stretch stagnant earnings far enough to buy the things they wanted, many consumers turned to borrowing or dug into savings. Mark Zandi of Regional Financial Associates, an economic forecasting firm, figures credit-card, auto and personal loans outstanding rose 7% by the end of February over a year earlier, while the personal-savings rate over the three months ending in February, averaged a fat, round zero. Consumers caught between slowly rising incomes and more burdensome debt and fewer savings do not just feel pinched; they are.

What can be done? The Administration's emphasis, says Tyson, is on improving "the quantity and quality of jobs." Clinton, in a speech last week, mentioned one approach: overhauling the unemployment-compensation system so that anyone registering will be offered retraining and placement assistance, not just money. That is precisely the kind of initiative, however, that has been starved for funds as the Administration and Congress struggle to reduce the budget deficit.

Fundamentally, government and private economists put their hope in a kind of snowball process. First, the economy develops some self-generating momentum. There are signs that this is beginning. As production recovers, people who have held on to well-paying jobs get over their fear that they too will be laid off and decide they can now buy that dishwasher or wall-to-wall carpet; their purchasing pushes the advance further. Then, as sales rise and companies need more production, firms that have got their costs down and their profits rising smartly begin at last to hire more people at better wages.

Even Roach of Morgan Stanley thinks a "productivity-led recovery" could bring back the days when a rising tide really did lift all the boats. But he adds a strong caveat: "My darkest fear is of macho corporate managers who will slash and burn, and will not make a true commitment for the longer haul to expand their market share through judicious rebuilding. Then we will have hollow industries that will undermine our competitive advantage over the long haul, and that will be an unmitigated disaster for growth and jobs." Downsizing was and is a painful necessity, but bosses need to remember that employees are also customers -- and firing your customers, or paying them too little to enable them to buy the goods they produce, cuts a lot more than costs.

CHART: NOT AVAILABLE

CREDIT: From a telephone poll of 800 Adult Americans taken for TIME/CNN on April 6-7 by Yankelovich Partners Inc. Sampling error is plus or minus 3.5% Not sures omitted.

CAPTION: Statistics show that the country's economy has been improving in some areas over the past few months. Do you personally feel better off as a result of this improvement?

With reporting by Bernard Baumohl/New York, Sophfronia Scott Gregory/Lawrence, Scott Norvell/Atlanta and Suneel Ratan/Washington, with other bureaus