U.S. Economy: Companies Cut More Jobs Than Forecast (Update1)
By Timothy R. Homan and Shobhana Chandra

Sept. 2 (Bloomberg) — U.S. companies cut more jobs than forecast in August and boosted their workers’ productivity the most since 2003 in the second quarter, signaling employers are seeking to cut costs further even as the economy stabilizes.

A survey by ADP Employer Services showed businesses reduced payrolls by 298,000 after a 360,000 decline in July. The Labor Department in Washington said productivity, a measure of employee output per hour, rose at a 6.6 percent annual rate in the three months through June.

With labor costs declining and employment continuing to deteriorate, today’s reports buttress the case for the Federal Reserve to complete its plans to buy $1.75 billion of bonds and forego raising interest rates until next year. Slack in the job market helps reduce any inflationary pressures stemming from the central bank’s record liquidity injections.

“Inflation risks are minimal and the key issue they should focus on is spurring growth,” said Michael Moran, chief economist at Daiwa Securities America Inc. in New York, who accurately forecast the gain in productivity. “There’s a turn under way in the labor market, though it’s a very slow turn.”

Stock-index futures dropped after the ADP report’s release, and the Standard & Poor’s 500 Index opened lower; it closed down 0.3 percent at 994.75.

Treasuries extended earlier gains after minutes of the Fed’s August meeting showed policy makers were concerned about the pace of a likely economy recovery. Yields on benchmark 10- year notes dropped to 3.30 percent at 4:26 p.m. in New York from 3.36 percent late yesterday.

Factory Orders

A separate report today showed factory orders advanced in July by the most in a year as companies sought to rebuild inventories after a record draw-down in the first part of 2009. The Commerce Department said orders increased 1.3 percent after a 0.9 percent gain in June.

“Most participants saw the economy as likely to recover only slowly during the second half of this year, and all saw it as still vulnerable to adverse shocks,” the Fed said in today’s minutes. “Labor market conditions remained of particular concern to meeting participants.”

Following the last two recessions, the central bank waited for at least a year after the unemployment rate peaked before raising rates. The Labor Department in two days is forecast to report the jobless rate rose to 9.5 percent in August from 9.4 percent in July; economists project it will reach 10 percent in early 2010.

Jobs, Spending

The ADP report, forecast to show a decline of 250,000 jobs, underscores the danger that the consumer spending that accounts for 70 percent of the economy may be slow to gain traction in coming months.

The report showed a drop of 152,000 workers in goods- producing industries including manufacturing and construction, while service providers cut 146,000 workers. Financial firms trimmed jobs by 19,000, ADP said, the 21st consecutive monthly drop for the industry.

Whirlpool Corp., the world’s largest appliance maker, said Aug. 28 that it will close its Evansville, Indiana, manufacturing plant, resulting in the elimination of 1,100 jobs, or 1.6 percent of the company’s workforce.

“Considering the severity of the recession and uncertainty over the strength and sustainability of the recovery, the labor market’s recuperation will be slow and painful,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania, which forecast a drop of 290,000.

Worker Productivity

Productivity of U.S. workers rose in the second quarter at the fastest pace in almost six years, the Labor Department’s data showed, as companies squeezed more out of remaining staff to boost profits. Labor costs, adjusted for the gain in efficiency, fell by a revised 5.9 percent annual pace, the most in nine years.

Lower expenses helped boost profits last quarter by the most in four years, a necessary first step in slowing firings. Productivity gains also help curb inflation.

Makers of durable goods from Intel Corp. to Rockwell Collins Inc. are among those seeing demand stabilizing as customers here and abroad, buoyed by growing profits and more accessible credit, begin to invest in new equipment.

The gain in factory orders was restrained by a decline in non-durable goods such as oil and food that masked a jump in demand for new equipment.

A rebound at automakers resulting from the government’s “cash-for-clunkers” plan may give orders an added boost in coming months as dealers restock.

‘Very Lean’

“Inventories are very lean and businesses are now going to have to increase production given the gain in orders,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York.

Leaner workforces allowed companies to protect earnings while the economy shrank at a 1 percent annual rate last quarter. Corporate profits rose 5.7 percent from the prior three months, the biggest gain since the first quarter of 2005, Commerce Department data showed last week.

Dell Inc., the world’s second-biggest maker of personal computers, topped second-quarter profit and revenue estimates after slashing costs. Chief Executive Officer Michael Dell, on a quest to save $4 billion a year, has farmed out 40 percent of the Round Rock, Texas-based company’s manufacturing.

To contact the reporter on this story: Timothy R. Homan in Washington at Thoman1@bloomberg.net; Shobhana Chandra in Washington at schandra1@bloomberg.net

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