Red-hot US economy turns pink

Shrinking profits caused manufacturers to lay off the most workers in adecade.

Despite one of the most spectacular booms in US history, industry is pointing workers out the factory gate in droves.

From Carolina textile factories to Washington jetliner plants, manufacturers cut 50,000 jobs last month for a total loss in the past year of 337,000.

Throughout the economy, companies are announcing layoffs at a faster pace than even in 1998, the biggest downsizing year of the decade, according to a report last week by Challenger, Gray & Christmas Inc., a Chicago outplacement firm.

The sweeping cuts mar an otherwise dreamy economy. Growth is robust, and inflation and unemployment are flat.

In the broad economy, demand for labor is so intense that many idled workers can shift into construction, finance, retail, or other jobs in the thriving service sector. Indeed, the economy in the past year has created nearly 3 million new jobs.

But the layoffs in manufacturing reveal a broad threat to an economic expansion that by year's end would be the longest on record, say a growing number of economists. Across the economy profit growth is slowing.

"We still see little or no [earnings] growth through 2000, as earnings lag economic growth," says a recent report by Salomon Smith Barney analysts in New York.

Earnings are caught in a pincer, squeezed by declining sales and average hourly earning growth of 3.6 percent, a faster pace than inflation. Pinched earnings threaten the highly valued stock market. Some economists believe the earnings trouble suggests the US might succumb to the slowdown dogging much of the world economy.

Usually, companies can wriggle out from an earnings squeeze by raising prices. But today stiff global competition, falling exports, and low inflation discourage such mark ups.

"Few companies are in any position to raise their prices even with demand robust," says Bruce Steinberg, chief economist at Merrill Lynch in New York. Instead, they are sustaining profits by cutting payrolls. The profit pain has hit myriad firms. Fourth-quarter earnings for Motorola Inc. fell 50 percent, while Caterpillar Inc. saw its earnings drop 33 percent. Both point to slumping foreign demand.

The downturn is spreading from East Asia to Latin America and Europe. The slump across the Atlantic is especially unsettling; Europe was widely counted on to help the US forestall a global recession.

But during the fourth quarter German gross domestic product fell for the first time in three years and Great Britain's economy grew at its slowest pace in six years.

In recent months, European banks have curtailed credit at home and overseas, quashing growth. "Events overseas will hurt the economy more," says Mark Zandi, chief economist at Regional Financial Associates in Chester, Pa. "The trade balance will deteriorate ... and we will no longer be able to gain as much benefit from lower interest rates and lower prices."

Still, some economists dismiss the idea that foreign-born deflation will throttle the US boom, now the only major engine for global growth. "The arguments in favor of faster growth are powerful," says Ian Shepherdson, chief US economist at High Frequency Economics in Valhalla, N.Y. Consumer confidence is strong. Durable goods orders are surprisingly resilient. And tax refunds and extra cash from mortgage refinancing should sustain demand.

But economists agree that the US cannot expect to indefinitely remain, in the words of Fed Chairman Alan Greenspan, an "oasis of prosperity" amid a stagnant world economy.

The hardship of Virginia's "Northern Neck," the peninsula molded by the Potomac and Rappahannock Rivers, reveals the consequences if earnings wither and manufacturing layoffs spread economy-wide.

For more than four decades, Tidewater Virginia and Levi Strauss & Co. have enjoyed a custom-made fit: Production of the company's blue jeans, an American icon, seemed naturally suited for the economy of the native land of President Washington.

But now Levi is quitting the river-fed region. After 45 years, it has laid off all 314 workers at a jeans factory. The shutdown of the Warsaw, Va. plant is part of Levi's plans this year to close half its 22 facilities in North America and let go 5,900 employees.

Levi, long synonymous with blue jeans, has lost market share because of a failure to stay abreast of fashion. With the dollar strong and overseas companies desperate for contracts, Levi can't compete with firms paying foreign workers much less than the $10.12 an hour in wages and benefits paid to the average US garment worker.

The plant shuttering has blindsided one-company Warsaw. Levi was the No. 1 employer, providing nearly 1 out of 10 jobs in Richmond County. Steady work is vital in a region that, because of reliance on tourism and fishing, often endures seasonal unemployment as high as 20 percent.

"This is a big blow," says Steve Whiteway, Richmond County administrator. "Levi always offered one of the better paying jobs with excellent benefits."

The numbers in lost jobs tell only part of the story. Some 80 percent of Levi workers in Warsaw were women, many of them single mothers. The company offers generous help in severance and retraining, but those benefits end in October.

"A lot of workers were hit hard because they've got kids but no husband," says Lois Lewis, a former worker. "There's a lot of tears and a lot of women saying, 'What am I gonna do?' "