The Economy Permanent Pink Slips

By John Greenwald

Marley and Frances Kendall have little to celebrate this Labor Day. Marley, 55, lost his job as a Four Star Bus Lines driver last May. Two months later, Frances, 45, was out of work when the state of Minnesota shut an unemployment- claims office where she had been a clerk for nearly 15 years. The double whammy has forced their son Marley Jr. to drop out of college and the Kendalls to move from their cherished lakeside home near the town of Ely to the Sunbelt to look for jobs. The prospect of uprooting is especially painful, Frances says, "when you've worked all your life and you want something for your later years."

This recession may be at or near an end, but the Kendalls and millions of other U.S. layoff victims could find it difficult, if not impossible, to find new jobs. Squeezed by foreign competition and the vast debt load that companies assumed in the 1980s, American firms can no longer afford to hire back workers anywhere near as briskly as they have done after past recessions. Quite the contrary: as banks, retailers, computer makers, defense contractors and other firms from Boston to Burbank slash their payrolls in the face of falling profits, experts say nearly half the 1.6 million jobs the economy has lost in just the past 13 months may never be restored.

That grim prospect will further dampen what is already shaping up as the weakest U.S. upturn since World War II. "Even if there were no recession, there would still be massive layoffs," says Hugh Johnson, chief economist for the New York securities firm First Albany. "People are going to lose their jobs, and they are not going to be rehired." Concurs Allen Sinai, chief economist for the Boston Co. Economic Advisers: "The name of the game is to hold down the nose count."

The corporate downsizing has inspired doubts about whether the slump that began in July 1990 has really ended. In the latest sign of hard times, the Commerce Department last week said the U.S. gross national product dipped 0.1% in the second quarter this year, marking the third straight quarter of decline. While many economists still predict that the U.S. will show at least slight growth for the third quarter, the report indicated just how shaky the economy has become. And consumers, whose purchases account for two-thirds of the GNP, could become increasingly reluctant to spend. The government said last week that the personal income of Americans fell 0.1% in July, breaking a string of five monthly gains.

Continued layoffs have left many people nervous despite some recent signals that conditions may improve. In one such report, Commerce said last week that its index of leading economic indicators rose a strong 1.2% in July. At the same time, Commerce said orders for factory goods surged 6.2% in July, the biggest gain in 21 years.

While strong government action helped pull the U.S. out of past recessions, Washington this time seems powerless to play its traditional role of jump- starting the economy. The massive federal deficits that helped fuel the creation of 22 million new jobs in the 1980s have made fresh tax cuts or spending programs politically and economically anathema. Moreover, the Federal Reserve Board has resisted spurring job growth by sharply dropping interest costs, lest the tactic speed up a relatively modest 3% inflation rate.

The government also acquiesced in the debt binge of the '80s, when companies borrowed more than $1.5 trillion to finance takeover wars and build skyscrapers, luxury condominiums and vast malls that now stand largely empty. "The 1980s will go down in history as a time when financial capital overwhelmed human capital," says Robert Reich, professor of public policy at Harvard's Kennedy School of Government. "Business debt will continue to be the most troubling constraint on corporate America, and the workers are going to pay the price."

In Washington, the Bush Administration counters that the economy is resilient enough to move beyond these excesses. The Bureau of Labor Statistics predicts that the U.S. will add 18 million new jobs in the '90s. "Occupation after occupation is going through restructuring," says Roberts Jones, Assistant Secretary of Labor for employment and training. "These are signs of an extremely healthy system lining itself up to be competitive and to grow."

Yet Democrats are betting that a faltering economy will provide them with a long-sought issue for the 1992 campaign. Declares Massachusetts' Edward Kennedy, chairman of the Senate Labor and Human Resources Committee: "Even economists who see the beginning of a recovery acknowledge that it is likely to be weak. And an upturn will not put an end to the basic problems affecting the changing work force." Concurs Harvard's Reich, who has been one of the Democrats' chief economic gurus: "Efforts to improve productivity by using a slash-and-burn policy with employees could backfire. The remaining workers can be resentful and demoralized because they are stuck doing two jobs or more. It may all backfire and lead to lower productivity."

Such strains are already apparent in service industries, ranging from airlines to department stores to Wall Street, where layoffs have struck particularly hard. The troubled banking sector alone has lost more than 100,000 jobs as a result of consolidations and closings since 1989; the recent wave of megamergers will only accelerate the trend. BankAmerica's $4.5 billion acquisition of Security Pacific will reportedly eliminate 10,000 white-collar jobs, or 11% of the companies' total work force. "People who get laid off when banks merge don't get rehired," says David Wyss, an economist with the consulting firm Data Resources. "That is a permanent, structural change."

That is also true for the draconian cutbacks at giant manufacturing firms. IBM has pared 32,000 jobs from its payroll since 1985 and plans to reduce its work force by another 17,000 this year. The latest moves will trim IBM's work force to some 356,000 as Big Blue struggles to regain a share of the worldwide computer market that has slipped from 35% a decade ago to less than 25% today. "We've cut layers of management," says a company spokesman. "These are our ways of staying alive and being competitive." In Detroit, Ford, Chrysler and General Motors have eliminated 350,000 jobs since 1979, a reduction of 36%. The Big Three plan to lop off another 20,000 white-collar positions this year.

Even innovative small companies, a major source of jobs in the go-go '80s, are laying off workers in the slow-mo '90s. According to a study of more than 900 U.S. companies by the American Management Association, a business research group, nearly half the firms with fewer than 100 employees dismissed workers / during the 12 months that ended last June -- a resounding increase over the 29% that reported layoffs during the previous 12 months. In the latest survey, companies of this size laid off an average of 24 workers per firm. "Small companies are less likely to downsize than larger ones," says Eric Greenberg, an A.M.A. editor who compiled the report. "But when they do bite the bullet, they bite it hard."

Layoffs have been turning the lives of midlevel managers and other white- collar workers upside down. Bruce Deberry, 38, earned $60,000 a year in 1989 as a project manager for Digital Equipment Corp. while living comfortably in the university town of Durham, N.H. Sensing that layoffs were imminent, Deberry quit to get a jump on changing jobs. But he has found only short-term consulting work and has earned just $10,000 so far this year. He now faces bankruptcy and foreclosure on his home. "The worst part is the feeling that I'm all washed up at 38," Deberry says. "Inside of me, I know I have a lot to contribute. But I have a hunch that if I'm working in 10 months, it will be as an overqualified employee for someone younger than me."

In nearby Rhode Island, Gregory Schmellick, 49, is also struggling to get back on his feet. Schmellick was laid off in June as vice president of Resource Conservation Systems, an installer of energy-saving equipment that saw its orders vanish when ailing utilities canceled rebate programs aimed at encouraging conservation. Schmellick now wants to change careers. But, he says, "every industry is sitting on the fence. Demands for services are not picking up. People are afraid to venture out because they don't know if another Hurricane Bob is coming through. They are hunkered down and waiting."

Despite heavy odds -- most beyond their control -- some plucky ex-employees do manage to get back to work. In 1988, at the age of 50, Linda Drumm lost her $20,000-a-year job as a supervisor in a dress factory in Mattoon, Ill., when the plant closed its doors. The fresh-faced clerk she encountered at a local unemployment office held out little hope for a good new job. "I hate to tell you this," Drumm recalls the young woman saying, "but you know that you're over the hill." The remark hurt her deeply, but Drumm now says, "I really owe that girl a thank-you because she put a fire under my tail." With the help of a government program for dislocated workers, Drumm spent the next two years earning a bookkeeping degree, and now works for a local entrepreneur. It will take a nationwide confluence of such grit, entrepreneurship and effective public programs to speed the recovery -- and put Americans back to work.

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CREDIT: TIME Chart by Steve Hart

[TMFONT 1 d #666666 d {Source: Bureau of Labor Statistics/Data Resources}]CAPTION: WHO'S GONE FOR GOOD

With reporting by Bernard Baumohl/New York, Marc Hequet/St. Paul and Elaine Shannon/Washington