U.S. buckling down for a long, tough economic slog

McClatchy NewspapersAugust 14, 2011 

US NEWS ECONOMY-SLOG 1 MO

Businessman John Mensinger, President of American Lumber Co. in Modesto, California, is the grandson of William R. Mensinger, and has been working at American Lumber Company since 1986.

DEBBIE NODA — Debbie Noda/Modesto Bee/MCT

KANSAS CITY, Mo. — We've worked down credit card debt and tended to our savings (mostly).

America's businesses have trimmed the fat — and then some — from their expenses.

The federal government has found a way to cut spending (barely), cover its debts (for now) and avoid tax increases (again, for now).

All this has kept our still-remarkable standard of living at least temporarily intact and protected the economy from an apocalyptic meltdown.

Now comes the harder part: There are few things left to cut and only spotty evidence of better prospects ahead.

The stock market pogo-stick act last week that followed a rating agency's downgrade of U.S. Treasury bonds and the nobody's-happy deal that raised the federal debt ceiling only worsened our economic confidence.

Whether the economy is taking a double dip in the stagnant pool of recession or is in the middle of a years-long trek of slow growth, virtually no one sees boom times starting soon.

So how will families and businesses cope, when they've already made so many painful adjustments? With more of the same belt-tightening, most likely, and that may only make things worse.

Businesses look to stick with the cost-cutting and job-cutting that's become the go-to strategy for making ends meet, so when the economy most needs people working and spending, that boost goes missing.

"Employers have absolutely no hesitancy to reduce head count," Kansas City recruiter Dave Flanders said. Even companies that are looking to hire are gun-shy about taking risks on new workers, he said.

Consider not just that unemployment is above 9 percent, but that it's been stuck there for most of the last three years. It's the longest such stretch since the Great Depression. For two and a half years, the ratio of job seekers to advertised openings has been more than 4 to 1.

"And we're still very dependent on consumer spending to drive the economy," said Scott Anderson, a senior economist at Wells Fargo & Co.

With so many people out of work, and so many more anxiously pinching pennies for fear they might join the jobless, the shopping sprees that could kick-start this economy seem more distant.

Frugal is getting old. But who's got the nerve to spend?

Look at what's become normal for suburban Kansas City's Alex Freeburne, who lost a software engineering job in early 2008:

Doesn't eat out. Ever. Never pays more than $1 to rent a movie. Always plans meals carefully. Shops estate sales on the last day, when people are willing to negotiate. Looks for scratch-and-dent deals. He's ultra-careful with credit cards, and pays them off as soon as he earns something.

He refinanced his house, cut his land-line phone and cut cash-only deals with his doctors.

"The single biggest thing about surviving this economy," Freeburne said he learned, "was to take cash flow very seriously."

He became a regular at discount grocer Aldi. He started a business in his garage — making large wooden cutting boards — for a little extra cash. He and his wife took temporary jobs.

If things continue without a steady paycheck, Freeburne said, he'll cut cable TV, use fans instead of air conditioning, unscrew some light bulbs.

His journey down a corner-cutting path started when he was laid off by Sprint Nextel, the third-place company that looks especially vulnerable in a recession. The cell phone company based in Overland Park, Kan., cut roughly 5,000 workers in the early part of the recession.

Even in tough times, the wireless carrier said, the cell phone is among the last things that Americans will dump: Sprint may be struggling, but it netted 1.1 million new customers in the last quarter.

Businesses, on the other hand, have signed up for fewer devices because they have fewer employees. Or they tell employees to buy their own cell phones. Or they delay new purchases.

Sprint continues to cut back internally. Somebody who wants to travel across the country for business must get an OK from a vice president. Want to travel abroad? A senior vice president has to sign off. Increasingly, teleconferences replace such trips.

The company is also more cautious about launching new phones without burning through its existing inventory — tricky stuff in an industry increasingly driven by the latest gadget.

Meanwhile, consumers have shown their anxiety about the future in the way they're buying phone service. More and more, people opt for prepaid wireless plans rather than two-year contracts.

"That's really reflecting their uncertainty about their jobs and their lifestyle," said Bill White, Sprint's senior vice president of communications.

After years of riding through on debt and figuring tomorrow would pay for itself, Americans almost suddenly — and perhaps problematically — have become savers.

Consumer debt in the United States has fallen more than $1 trillion, or nearly a third, in the last two years. Much of that came from lenders writing off bad mortgages, but not all. Before the recession, Americans saved less than 2 percent of their post-tax incomes. Today, savings rates are near 6 percent.

The ability to cut back further will vary widely. Fully 42 percent of workers said in a recent CareerBuilder survey that they were living paycheck to paycheck, including 14 percent of those who pull down six-figure incomes. But those numbers are down from two years ago, suggesting that more Americans are learning to live within their means.

Yet there still may be room to cut. Roughly half in the survey said that, regardless of their finances, they would "absolutely not" live without Internet service, mobile phones or driving.

It's a similar tune in executive suites. Of the nonfinancial companies in Standard & Poor's 500-stock index, cash reserves are up 59 percent to $1.12 trillion since mid-2008.

This may be just the rainy day America has been saving for. Having those healthy cash reserves means that some companies will be able to avoid further layoffs when revenue comes up short.

That assumes, though, that a company perceives this to be a short-term slow time.

"But if you thought this was going to be a long-term problem," Wells Fargo's Anderson said, "they'll hold on to the cash and not the people."

This far into however long this downturn will last, corporate America seems more inclined to brace for an even gloomier day.

"Companies are saying, 'I can't keep the secretary or the second layer of management,' " said Marilyn Taylor, a professor of strategic management at the Bloch School of Business and Public Administration at the University of Missouri-Kansas City.

John Mensinger, the president of the 84-year-old, family-owned American Lumber Co. in economically troubled Modesto, Calif., already has made a lot of those hard choices. He's cut his staff to 18 from 35, imposed furloughs, reduced pay and trimmed health benefits.

He slashed the lumber yard's $1.8 million in inventory below $1 million and sold a five-year-old semi-trailer — the newest in the company's once-shiny fleet — for $50,000 to boost cash flow.

He had to. His company's sales have plummeted to a third of their 2005 peak.

"I've lost all of my profit, and I've had to cut my operating costs by roughly half," Mensinger said. But now he sees a flicker of hope.

"I don't see a lot of room for easy cost savings," he said. But "our gross margin is slightly up. At the current level of sales, I believe we're sustainable."

Nationally, the freshest economic indicators send bafflingly mixed signals. Retail sales ticked up 0.5 percent in July, the U.S. Commerce Department said Friday, the best showing since March. The same day revealed that consumer confidence, as measured by the University of Michigan, fell in August to its lowest level since May 1980. It also showed that consumers expect the economy will be even worse six months from now.

Lower oil and gasoline prices might give families enough elbow room in their budgets to travel more and buy more, gradually greasing the wheels of recovery.

But households have seen several years in which their wages have, at best, stagnated even as their anxiety over keeping those paychecks increased. Families saw Standard & Poor's downgrade government bonds.

Meanwhile, their nest eggs — 1 in 5 have dipped into retirement income or savings in the last year — have been battered.

Wall Street hasn't helped. The down-up-down ride of the last week is enough to inspire a drinking game: The Dow moves 100 points, take a shot. Your blood alcohol level will top your 401(k) numbers by noon.

The paradox is that those declining market shares represent companies that have been turning good profits and still feel too timid to start hiring again.

"You want to see some signs of optimism," said Fred Hays, a finance professor at the Bloch school. "But somebody's got to take the first step."

(Canon and Stafford report for The Kansas City Star. McClatchy's Greg Gordon contributed to this article from Washington.)

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