Why businesses, finally, are starting to hire

Old Dominion Window and Door Co. just couldn't keep up with demand. First, the Richmond, Va., company bought machines that were supposed to take the place of three people. Then, it tried overtime. Now, it has doubled the size of its plant and expanded its workforce by 10 to 20 percent. And it's still not done: It will add another 15 or 20 workers this year. "We're just trying to keep up the orders," says Jim Greene, the general manager.

In some respects, Old Dominion epitomizes the US economy. For sometime, companies have been able to handle an expanding economy by either buying machines or squeezing more output out of workers in one of the more impressive productivity periods in American industrial history.

Now, however, the economy has expanded to the point where business has to hire more workers. That, in part, is what lies behind the strong growth in jobs the past two months. Last week, the Labor Department reported that businesses hit the "hire now" button, adding 288,000 new jobs and dropping the unemployment rate from 5.7 percent to 5.6 percent. This followed the addition of 337,000 jobs in February - a vast improvement over the tepid job gains of the past year. Economists expect the hiring trend to continue through most of the year.

The improving jobs picture also means the Federal Reserve can begin the process of raising interest rates, possibly as early as next month - after it gets yet another jobs report.

"We're seeing job growth because business has confidence in the expansion's longevity and strength, and companies simply stopped trying to squeeze whatever they could out of the workforce," says Richard DeKaser, chief economist at First National City Corporation in Cleveland.

The reduction in squeezing is evident in the numbers as well. Last week, the Labor Department reported productivity in the first quarter slowed to a 3.5 percent annual pace, down from the 4.4 percent improvement for all of 2003. "The first two years of an economic recovery are always the best for productivity, then things peter out," says Mr. DeKaser.

Old Dominion illustrates some of the dilemmas managers face in trying to decide whether to add workers. The new machines that the company bought still didn't keep up with demand, says Mr. Greene. But as he expanded overtime, he wondered if that was worthwhile. "After you're working someone 12 extra hours a week, you wonder if they are really that much more productive: You're taking them away from their families, and with the extra hours they are becoming tired and susceptible to injury," he says.

Federal Reserve chairman Alan Greenspan recently said he expects the efficiencies in the economy to slow as well. But hardly anyone has a good idea by how much or what that will mean, exactly. Recently, former Federal Reserve governor Lyle Gramley estimated that if productivity drops by 1 full percentage point, it adds 2 1/2 million jobs to the economy over the next two years.

Yet it also adds 1 full percentage point to inflation. "If it does turn out that way, the Fed will have to move more aggressively," says Mr. Gramley, a consulting economist with the Schwab Washington Research Group.

For now, most forecasters are expecting the Fed to take a measured approach by hiking interest rates 1/4 of a percentage point at the end of June. "It's clear they no longer need to step on the gas pedal as they have been," says Gramley, who anticipates another rate move in August.

The better April jobs number quickly entered the political realm. Treasury Secretary John Snow credited the president's tax cuts for the increase in hiring, while Democrats responded that the total number of people on payrolls is still nearly 1.5 million below where it was at the beginning of the Bush administration.

Without taking a side, economist Anthony Chan says jobs are not as plentiful as they should be at this point in the economic cycle. "At this stage we should have created over 5 million jobs since the economy bottomed out in December of 2001, but we are barely in positive territory," says Mr. Chan, chief economist at Banc One Investment Advisors Corp. in Columbus, Ohio.

But that may well be changing. Aside from the Labor Department report, anecdotal signs suggest the job market is picking up. For example, Craigslist, a San Francisco-based website that lists job postings, reports a 50 percent jump in entries since January. It's now getting more than 80,000 new job postings a month.

"It's growing as rapidly as late 1999 or 2000," says Jim Buckmaster, the CEO. "However, it doesn't quite have the same intensity: At that time, people were rushing in their postings late on Friday in the hope that future employees would read them over the weekend."

According to Mr. Buckmaster, the hottest areas so far have been retail and restaurants, finance and accounting, and the entertainment industry. In the high-tech arena, he says demand is rising for software developers.

Part of the job activity comes from companies hiring after steep cuts. That's the case with another Bay area company, Addis Brand Strategy & Design, located in Berkeley. As the high-tech bubble burst, Addis cut its staff in half, to 20 people. Now it's finding that clients, such as Intel, Pepsi, and Bic, are spending money again.

"Now, we're looking for brand strategists and designers," says CEO Steven Addis. "The market is actually tighter than you might think," says Mr. Addis who hopes to double his staff this year.

Some of the new hiring is happening because businesses are just plain more confident. That's the case with Old Dominion. Its business has expanded beyond the South, and it is now shipping windows as far away as Indiana. "Demand is there," says Greene.