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James Flanigan

A Recovery High on Efficiency, Low on Jobs

August 24, 2003|James Flanigan

Caterpillar Inc.'s heavy-duty construction equipment is used to move mounds of earth. Last week, tellingly, something else moved: the company's stock price.

Anticipating a broad economic upturn, investors pushed shares of Peoria, Ill.-based Caterpillar to a record high.

In nearby Moline, Ill., Deere & Co. also is enjoying a good year, with strong orders materializing for construction machinery and farm equipment. Deere's stock climbed close to its all-time high last week, as the company increased its sales forecast. Meanwhile, eastward in Columbus, Ind., Cummins Inc., a big manufacturer of heavy truck engines, is likewise seeing an upturn in sales -- another clear signal that the industrial economy is recovering.

Yet in each case, something is missing from this turnaround story: jobs.

Caterpillar is achieving its gains with about 3% fewer workers than it employed last year. Deere is hiring to replace retirees but not to expand its workforce. Cummins too is keeping its payroll stagnant.

In one sense, this is good news. As U.S. companies produce more goods and earn more profit by using fewer workers, national productivity increases. And productivity is the key to an economy with ever higher living standards and continued low inflation.

But at the same time, greater efficiency is carrying a heavy price in terms of lost employment opportunities. In fact, overall, the United States had nearly half a million fewer jobs in July than it had in January.

There has been much talk, of course, about the "jobless recovery." Yet, as UC Berkeley economist Harley Shaiken notes, what is unfolding is much more sweeping and lasting than this term suggests.

"This is not simply a jobless recovery," says Shaiken, an industrial relations expert. "This is the first post-global recovery."

Indeed, what we're seeing in the performance of companies such as Cat, Deere and Cummins are examples of how U.S. industry has fundamentally changed in the last decade.

All three of these major corporations -- and many others -- now operate seamlessly on all continents, with design, production, supply and marketing staffs working in Asia for Asia, Europe for Europe and North America for the United States, Canada and Mexico.

It used to be that many of these functions were performed on U.S. soil and then exported. Now, thanks to highly advanced communications systems, they are done locally across the world.

Take Cummins. The company, which generates 40% of its revenue outside North America and has about the same percentage of its employees based overseas, has supply-chain offices on five continents.

"We were an international company in the 1980s," says a spokesman for Cummins. "Now we are global."

Caterpillar, which employs about half its 67,000 employees outside the United States, reorganized its operations a decade ago. Today, Cat has perfected its worldwide supply and production activities to such an extent that it makes money renting warehousing and offering logistics services to other companies, notably Ford Motor Co. and Honeywell Inc.

"These companies create new capacity every day simply by using less factory space to turn out the same or more goods," says Robert F. McCarthy, a Chicago-based analyst

for investment firm Robert W. Baird.

There is an irony in what has happened here. As they struggled in the 1980s to cope with global rivals, principally the Japanese, U.S. companies were criticized for not adopting sophisticated management techniques of inventory control (kanban, or just-in-time) and quality control (kaizen, or constant improvement).

Now, they not only have mastered these techniques, but they have even improved upon them -- paring job growth in the process. For example, Caterpillar's total revenue has increased 90% in the last 10 years while its total employment has risen a mere 29%.

Such patterns are likely to continue as the economy rights itself. A Federal Reserve survey of private economists released Friday predicts that the economy will gain strength through December and pick up in 2004, hitting its fastest stride in four years.

But the number of jobs created is likely to be proportionately less than such economic growth would have produced in earlier eras.

At their most optimistic, the 30 economists surveyed by the Fed foresee the U.S. jobless rate coming down by a few tenths of a percentage point. As the unemployed folks who would love to get on at a company like Caterpillar well know, that hardly qualifies as earthshaking.


James Flanigan can be reached at jim.flanigan@

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