|The New York Times is less sanguine that many of us on pen-l
Why a Soft Landing Could
Be Worse This Time
By GRETCHEN MORGENSON
ITH economic data
pointing to a
slowdown, it seems more
and more evident that the
Federal Reserve Board is
piloting the economy to
the soft landing that
everyone has hoped for.
But that may be harder
on American workers
than many people think.
At least, James Paulsen,
chief investment officer
at Wells Capital
Minneapolis, thinks so.
He fears that even a slight
decline in economic
growth could translate to
more severe job losses
than have been typical in
Why? Because of the marvel of United States
productivity, the very thing that has allowed
the economy to go full steam without creating
"What we now herald as a miracle because it
holds inflation down becomes a nasty thing in
a slowdown," Mr. Paulsen said. "If your
productivity is as good in an economic
slowdown as it is in an expansion, it
accelerates job losses because you can produce
more with even less."
Job creation has been slowing since 1997,
when annual payroll growth peaked at 2.5
percent. Payrolls are now rising by 1.8 percent,
yet gross domestic product growth is red hot.
"If it only takes 1.8 percent job growth to
produce 6 percent real G.D.P. growth," Mr.
Paulsen asked, "could we end up in a situation
where a soft landing of 2 percent to 2.5 percent
growth means jobs falling by one-half or 1
percent a year?"
Mr. Paulsen studied the relationship of job
creation and growth since 1950 and found that
even in tough economic times, job growth was
much higher than it is today.
For instance, from 1980 through 1984, a period
that included two recessions, each
percentage-point increase in gross domestic
product growth translated into a 0.61 percent
gain in jobs. But since 1995, every
percentage-point increase in economic growth
has resulted in just 0.10 percent more jobs.
A soft landing could be painful for workers for
other reasons. In recent years, corporations
have become obsessed with efficiency gains.
This mind-set could change management
behavior in a downturn, Mr. Paulsen argued.
"In the past, companies would cut capital
spending in an economic slowdown," he said.
"But capital spending has become efficiency
spending and companies may decide to
maintain capital expenditures this time and cut
the labor force instead."
The merger mania of recent years may also add
to greater-than-usual job losses in a slowdown.
From the mid-1970's to the mid- 1990's, Mr.
Paulsen said, there were 2,000 mergers and
acquisitions a year, on average. At today's
pace, 10,000 deals may be done in 2000. "If
you hit a slowdown," he said, "you're going to
find out that all these merged companies have
excess labor forces."
A case in point is Qwest Communications,
which acquired U S West in June. On
Thursday, the company said it would cut
12,800 jobs by the end of 2001 and increase its
capital spending to improve service and invest
in its core business.
If consumers were in sounder financial shape,
the job losses that a slowdown might bring
would not be so worrisome. But installment
debt and stock market margin debt carried by
consumers are now an astounding 24.5 percent
of disposable personal income. From 1965 to
1995, this figure averaged 18.4 percent. It is off
the charts thanks to margin debt, which now
accounts for more than 3.5 percent of
disposable income, up from an average of 0.78
percent for the 30 years ended in 1995. This
debt load also means that consumer spending
could contract significantly, exacerbating the
Of course, a slowdown in the economy is not
yet certain. Although Mr. Paulsen expects
growth to average 2 percent in the next 12
months, others don't agree. (Portfolios, Etc.,
Nevertheless, as Mr. Paulsen noted, the
productivity story has been a hugely positive
one in an expanding economy. Its potential
impact in a contraction has been largely