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Jobless Produce U.S. Profit on Productivity With Less Inflation
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Carne da lavoro o "della bellezza del licenziamento"

Malcolm Barnes distributed snacks for 27 years before losing his job in October 2007. After applying unsuccessfully with food companies, he’s taken welding and machining classes and is looking for manufacturing work.

“If they are not hiring in vending, you have to change with the times,” said the 53-year-old Greenwood, South Carolina, high-school graduate. “I am doing everything I can to upgrade.”

The 6.8 million Americans out of work for 27 weeks or longer -- a record 46 percent of all the unemployed -- are providing U.S. companies with an eager, skilled and cheap labor pool. This is allowing businesses to retool their workforces, boosting efficiency and profits following the deepest recession since the 1930s, and contributing to a 61 percent rise in the Standard & Poor’s 500 Index since March 2009.

“Companies are getting higher-productivity employees for the same or lower wage rate they were paying a marginal employee,” said James Paulsen, who helps oversee about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “Not only are employees higher skilled, you have a better skill match. You have a more productive and more adaptive labor force.”

Falling wage pressures will help keep inflation low, contributing to lower Treasury-bond yields, according to Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. He forecasts 10-year Treasuries will yield about 3.1 percent in the third quarter, compared with 4 percent in April.

Wage Pressure

The lack of wage pressure also “reinforces the case for globally exposed companies” because “there has been better cost containment in the U.S. than in some of our competitors,” said Ethan Harris, head of North America economics at Bank of America-Merrill Lynch Global Research in New York. He said this would benefit businesses such as Cincinnati-based Procter & Gamble Co., the world’s largest consumer-products company, and Atlanta-based Coca-Cola Co., the world’s biggest soda maker.

Fired workers from Wall Street to South Carolina, where 58 percent of the unemployed have been without work for six months or longer, say they are networking, going back to school and retraining to stay relevant as jobs become more specialized. Some still may not achieve comparable positions, and Federal Reserve officials say lasting joblessness may weigh on economic growth.

‘Persistent’ Unemployment

“There is a structural dimension to unemployment that looks persistent,” Neal Soss, chief economist at Credit Suisse in New York, said in an interview. “Regrettably, it feeds on itself. People who have been out of work half a year or more naturally are going to have a harder time re-engaging on satisfactory terms. Their skills can atrophy, and their attitudes toward life and work can be damaged. It is debilitating.”

Even as manufacturing rebounds and job creation resumes, the average duration of unemployment was a record 34.4 weeks in May, twice the rate of the 1981-82 recession when joblessness reached 10.8 percent, compared with a high of 10.1 percent in October 2009.

The Labor Department will report on July 2 that unemployment rose to 9.8 percent in June from 9.7 percent in May, according to the median forecast of 50 economists in a Bloomberg News survey.

Intellectual Skills

Hiring standards have changed during the past decade, with more jobs requiring employees to use computers and the Internet and to apply judgment and intellectual skills, said Sandra Johnson, workforce-development administrator for the Upper Savannah Council of Governments in Greenwood, South Carolina.

She coaches job seekers with tips on “behavioral interview” questions that are now typical among manufacturers: “Tell me a time you had a problem and how did you solve it?”

U.S. productivity gains averaged 2.9 percent from 2000 through the first quarter of 2010, compared with 2.1 percent in 1990-1999 and 1.5 percent in 1980-1989, according to the Labor Department. The increased efficiency has helped improve earnings, with more than 80 percent of companies in the S&P 500 index reporting profits that exceeded the consensus analysts’ estimates during the most recent quarter, Bloomberg data show.

“The U.S. has been enhancing its global competitiveness,” Harris said. “We don’t see inflation picking up until there is a substantial drop in the unemployment rate.”

Low Inflation

The Fed’s preferred price gauge, which excludes food and fuel, rose 1.3 percent in May from a year earlier. Harris projects inflation will average 1.1 percent by this measure in 2010 and 0.8 percent in 2011.

While Wells Fargo & Co., the biggest U.S. home lender, has reduced the number of its financial advisers in the past year, the San Francisco-based company has added “high-quality, experienced” employees with productivity “more than twice that of the advisers we lost,” Senior Executive Vice President David Carroll said at a May 14 investor meeting.

“Very specific skill sets is what will get people hired these days,” said Gary Townsend, president of Hill-Townsend Capital LLC in Chevy Chase, Maryland, a hedge fund that specializes in financial firms. “Companies are able to slice off the weakest members of the team and find very highly qualified and motivated replacements. There is very little wage pressure.”

‘Fantastic Productivity’

Google Inc., owner of the world’s most popular search engine, has achieved “fantastic productivity,” partly by moving “from a single product to a multiproduct sales force,” Henrique de Castro, head of media and platforms at the Mountain View, California-based company, said at a June 2 technology conference in New York.

While the labor market is “improving gradually,” joblessness is likely to constrain household spending, the Fed said in its June 23 statement. “The record rise in long-term unemployment associated with the recession is likely to yield a persistent overhang of workers facing long unemployment spells, slowing the recovery,” said Fed Bank of New York economist Aysegul Sahin, Fed Bank of San Francisco’s Bart Hobijn and the University of Michigan’s Michael Elsby in a May report.

The U.S. economy grew at a 2.7 percent annual rate in the first quarter, less than the 3 percent estimate issued last month, according to Commerce Department data released June 25. The economy contracted in five quarters during the recession that began in December 2007, the worst performance since the Great Depression.

Consumer Pessimism

The Thomson Reuters/University of Michigan final index of consumer sentiment was 76 in June, below the level 12 months after the end of the 1981-82 recession even following a year of output gains. The consumer pessimism might reduce stock-market gains on the margin, keeping price-to-earnings ratios below their 20-year average, according to Soss. The ratio for the S&P 500 index was 15.6 on June 25, compared with an average of 20.4 since June 1990.

“Households are less eager to respond by buying stocks,” Soss said. “Mutual-fund flows show no sponsorship in the stock market. It leaves the market less grounded in steady hands, which is not necessarily conducive to good performance.” His prediction is for stocks to be “essentially unchanged on the year.”

Thirty-nine percent of large companies expect to add jobs in the next six months, while 17 percent plan cutbacks, according to a survey by the Washington-based Business Roundtable. The outlook “holds some optimism for continued expansion but there is also a lot of caution on the part of CEOs,” Ivan G. Seidenberg, chairman of the Roundtable and chief executive officer of New York-based Verizon Communications Inc., said on a June 23 conference call with reporters.

Older Workers

Some of the unemployed may not benefit from the recovery. Workers aged 55 years and older had an average jobless duration of 35.5 weeks in February, compared with 23.3 weeks for people 16 to 24 years old, according to the most recent data available from the Labor Department.

“I’d be very surprised if it turns around very soon,” said Harry Holzer, former chief economist at the department and a professor of public policy at Georgetown University in Washington. “There is a tendency toward a growing mismatch. The longer people are unemployed, the harder it is to bring them back in.”

Matt Prendergast, a former investment banker and managing director at Bear Stearns Cos. who covered the insurance industry, has been in the job market since September 2008. Being out of work that long may raise questions “in the minds of recruiters,” even though “I don’t feel there has been any erosion of my knowledge or market value,” said Prendergast, 51, of Mahwah, New Jersey.

Even so, the search has been “extremely competitive,” he said. “When you are responding to an ad, you need an exact match for every skill set or requirement in the job.”

Source >  Bloomberg

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