Don’t tell that to Hackett. The CEO of Steelcase, the country’s largest office-furniture maker, watched his profits plunge by 51 percent in the first quarter, forcing the executive to lay off 10 percent of his work force–1,450 people. He worries that another round of layoffs of as many as 500 workers may be necessary in the fall. “Business has not picked up enough yet to take away that threat,’’ warns Hackett.
To an unprecedented extent, we’re living in a split-personality economy. Consumers, whose spending accounts for two thirds of the economy, are keeping us out of a recession with their surprisingly persistent urge to splurge. They’re still buying homes and cars at near-record rates. Many corporate executives, however, are unrelentingly pessimistic and bracing for tougher times. Profits are in a free fall, and companies are slashing spending on new equipment and hacking away at payrolls (just last week Compaq, Alcatel and Corning announced a combined 7,500 layoffs). The government has released data showing that jobless claims jumped to their highest level in nine years. The sharp divergence in outlooks, the fundamental disconnect between consumers and CEOs, is unique to this downturn. “It doesn’t add up,’’ says Maria F. Ramirez, president of MFR, an economic consulting firm. In previous slowdowns, problems in corporate America quickly dampened consumer spending, particularly for big-ticket items like houses and cars.
This much is certain, though: these seemingly separate economies will inevitably merge into a single personality. Will the endless spending spree by consumers lift the corporate sector out of its funk? Or will the dark mood in boardrooms lead to more layoffs, spooking shoppers into shutting their wallets and creating a downward economic spiral? For now all eyes are on the unemployment rate. At 4.5 percent currently, it’s still low by historical standards. But it’s ticking up steadily, and many experts predict it will reach 5 percent later this year. If it rises above that mark, and more people know a friend who has lost a job, economists say that could finally undermine consumer optimism just in time for Christmas. “I see 5 percent as the trigger point,’’ says William T. Wilson, a senior economist at Ernst & Young, the accounting and consulting firm. “Nothing will cause a faster retrenchment in spending and consumer confidence.''
And more companies will soon be pulling the trigger. A recent survey of 222 chief financial officers showed that more than a quarter of their firms plan to eliminate jobs in the next year. That’s not surprising when you see the world through the eyes of Corning CEO John Loose. Corning, with soaring demand for its devices that channel light through fiber-optic cables, quadrupled the size of that division in the past three years. Loose had expected more of the same for this year, but orders from his telecom customers, who were devastated by heavy competition and weak demand, evaporated. The drop-off in business, says Loose, “was breathtaking.’’ Last week the company said it would cut 1,000 jobs, close three factories, take a $5.1 billion charge and eliminate the dividend for the first time since 1881. “We’ve told our employees we could be looking at further reductions,” he says, adding, “It’s prudent, if you’re managing a business, to think the economy is going to drag for some time.’’ He’s not alone. Most industrialists are “incredibly pessimistic,’’ says Gordon Richards, chief economist for the National Association of Manufacturers.
Other companies are taking extreme measures to avoid further layoffs or buyouts. Adobe Systems requires all its executives to fly coach class, and has done away with catered snacks at meetings. At Applied Materials, top executives took a 15 percent pay cut in April, and cut fees for directors on its board as well.
Corporate America is burdened with other problems, too. A strong dollar not only makes American products more expensive abroad, but foreign economies are also struggling with their own problems, dampening demand for U.S. goods. Banks in the United States have also closed the spigots on much of their lending. Commercial and industrial loans from large banks are down 7.6 percent this year–the first decline in many years. “After lenders get scared, they get real mean,” says David Littmann, chief economist for Comerica Bank in Detroit.
Still, there are plenty of signs that consumer spending will remain strong. After all, President George W. Bush’s tax refunds of as much as $600 per household, which will soon begin arriving in the mail, will pump about $40 billion into the economy. Energy prices are falling, so consumers also have more money left over to spend on other things after filling up their SUVs at the pump. And Alan Greenspan’s six interest-rate cuts this year mean lower finance charges for credit cards.
A little youthful naivete may be helping consumers shrug off signs of a shaky economy, too. Because so many Americans have grown up in prosperous times, they’re not easily rattled by signs of trouble. Joel Naroff, who runs an economic consulting firm, estimates that more than half of all employees entered the work force after the 1983 recession. That means the only recession they’ve worked through was brief, and was followed by the greatest expansion in history. “They may know that recessions are a problem, but it doesn’t strike fear in the hearts of people like it used to,’’ says Naroff. Consumer confidence about the economy is holding up because of people like Tracy Robertson, a 24-year-old accountant who just bought a $100,000 home near Chicago. “I’m not at all worried,’’ she says. “It’s going to perk up again.”
Optimists also argue that the layoffs may not be as bad as the headline numbers suggest. The cuts are relatively concentrated in the technology sector, which built up too much capacity to meet unrealistic expectations for demand. And many of the job cuts occur overseas or through early retirement. The staggering losses that many corporations have reported may also be overstating their problems, since getting as much bad news out at once (Cisco System’s recent $2.5 billion write-off for excess inventory, for example) makes it much easier for companies to show improvements in coming quarters. And those jumps will come, many economists believe. Predicts Naroff: “In the fall we should really start seeing things turning around with a vengeance.’’ Even last week surprising earnings news from Microsoft and Yahoo set off a market rally.
The key question is whether people like Mark Hodesh are ahead of the economic curve, or behind it. Hodesh’s Downtown Home & Garden shop in Ann Arbor, Mich., is so busy that he can barely answer questions above the din in his 5,000-square-foot store. Sales are up 30 percent, he says, and customers keep ponying up for expensive items like $5,000 teak garden furniture. His biggest challenge these days: “Loading up with as much merchandise as I can stuff in here so I can sell the hell out of it.’’ Corporate America can only hope that Hodesh’s personality is infectious.
