The unemployment rate is a relatively modest 5.5%. But that's because companies have figured out how to convert full-time employees who have benefits like health care into part-time ones who lack benefits and whose hours can be cut back at will. This is a great deal for companies and a lousy one for workers. And it is ultimately bad for investors.
The New York Times reports that 3.7 million Americans have seen their full-time jobs cut to part-time ones -- the highest number on record (the government started keeping track of this over 50 years ago). This record joins a host of others we've seen this year: record gasoline prices (over $4 a gallon), record Federal budget deficits ($490 billion for 2009), record Federal borrowing ($9.8 trillion soon to hit $10.6 trillion), a record decline in housing prices (15.8%), and a record weak dollar (down 71% to $1.5757 since January 2001 when one euro bought 92 cents).
The newly minted part-time workers are largely Hispanic men. Specifically, the Times points out that 73% of those who were forced into part-time work from the spring of 2007 to the spring of 2008 were men and 35% percent were Hispanic. The industries with the most part-time jobs were construction (28%), retail (14%) and professional and business services (13%).
The Times brings the part-time statistics to life with interviews. Here are two:
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Marvin L. Zinn, a Walgreen (NYSE: WAG) clerk, got his pay cut $100, or 15%, every two weeks from $650 to $550 as his weekly hours have dropped from 44 to 37.5. So what? He's carrying $2,000 in credit card debt to buy food; he's deferred dental work; and he stopped going to church because he says he can't afford to drive there.
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Ron Temple, a baggage loader for UAL Corp. (NASDAQ: UAUA), earned more than $20 an hour, plus health and flight benefits until he decided to go part-time as the lesser of three evils after being offered the choice of a layoff or transfer to another city. His bi-weekly pay dropped $780, or 58%, from $1,350 to $570 and he gave up some benefits. Temple and his wife -- who makes $1,000 every two weeks at a cancer clinic -- struggle to make their $1,753 monthly mortgage payment -- they're running up credit card balances -- $2,700 so far. They don't go out to restaurants and they buy cheap generic groceries through a program at their church.
The beauty of this arrangement for companies is that they don't pay health care benefits to many of their part-time workers. The Times reports that in retail, for example, 16% receive health insurance through their employers, while over 50% of full-time retail workers are covered.
What does this mean for the economy and investors? The thing about having 70% of Gross Domestic Product (GDP) dependent on consumer spending is that economic growth in the U.S. can only happen if consumers keep spending more money. Consumers can only spend more money if they get paid more or they can borrow more. With housing prices down, people can't borrow more money from the equity in their homes. And with more people taking pay cuts, consumer spending has only one place to go.
That downward trajectory in consumer spending will mean that companies that depend on consumers will make less money. The Walt Disney Company (NYSE: DIS) announced Wednesday that while it made 62 cents a share -- beating estimates by two cents -- it forecast declining ad revenues at ABC and ESPN since automakers, consumer electronics and financial-services companies are cutting back. And these industries are cutting back ad spending because consumers have less to spend and the companies themselves are cratering under a pile of debt.
Declining fortunes for these companies means more layoffs and shifts from full-time to part-time employment. Since workers are the very consumers who drive U.S. GDP growth, we are at the beginning of a long cycle of hurting workers, shrinking profits, debt write-offs and declining prices of goods financed with debt. And until we can create a post-bubble economy, such painful economic adjustments will continue to be a natural part of how we adjust to debt-driven expansion.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
