For one thing, the huge surge in layoff announcements this year--nearly three times last year's pace, according to outplacement firm Challenger, Gray & Christmas Inc.--makes it clear that Corporate America is intent on cutting labor costs. For another, March employment data reveal that services industries joined the factory sector in posting job losses for only the second time in the past decade.
More important, says Roach, almost all of last month's unemployment rise (from 4.2% in February to 4.3% in March) seems to reflect rising joblessness among white-collar workers. Whereas unemployment overall rose by 152,000 in March, it climbed by 99,000 among managers and professionals and by a further 97,000 in the white-collar support categories of technicians, sales personnel, and administrative aides, while falling in other occupations. "The risk is that this is only the beginning," he says.
As Roach sees it, the economy's woes stem not only from overinvestment in information technology inspired by the 1995-99 stock market bubble and New Economy hype, but also from a hefty overhang of white-collar workers hired to handle and master the new technology. Although white-collar occupations accounted for just 44% of the nonfarm workforce in 1994, they made up no less than 75% of the 12.3 million jobs added from 1994 to 2000.
In this trend, managers, executives, and professionals led the way, accounting for three-quarters of the growth in white-collar ranks. This group, notes Roach, are at the top of the white-collar salary pyramid, commanding high pay because of the expected payoffs from their productivity-enhancing skills.
The problem, says Roach, is that the slowing economy has revealed how excessive those expectations were. In hindsight, he believes the huge growth in managerial ranks itself seems suspicious, since higher productivity among such workers should have logically led to more restrained executive hiring.
In any case, overall productivity itself is slowing sharply, many info-tech-related businesses have gone belly-up, and Corporate America is having a profits recession. In response, cost-cutting is back with a vengeance, and IT workers in the dot-com world have been among the first to feel its effects. Unless the economy picks up steam soon and IT spending recovers, a scenario Roach personally doubts, he thinks high-paid managers will be next. A popular idea is that the rise of e-trading is itself partly responsible for the great Internet stock bubble of the late 1990s. In this view, investors who began to trade online were so entranced with the new medium that they accelerated their trading activity and engaged in excessive risk-taking.
At least as far as the average investor is concerned, it ain't necessarily so, claim James J. Choi and David I. Laibson of Harvard University and Andrew Metrick of the University of Pennsylvania's Wharton School. The economists recently looked at the trading behavior of over 50,000 participants in two corporate 401(k)s both before and after the plans added the capacity to shift assets among investment options through the Web instead of just by phone.
Although the researchers did find that trading frequency picked up significantly after 18 months of Web access, they also found that Web trades were a lot smaller than phone trades. Moreover, frequent traders tended to ignore the availability of the Web and to stick to their trusty telephones. As for performance, those who shifted to the Web did no better than they had before, and there was little evidence that they engaged in enhanced speculative activity such as "herding" (riding a market trend) or intensive short-term trading. Does the negative savings rate mean consumers will start squirreling away their pay again and slash spending now that their stock market gains--which presumably led them to stop saving--have taken a big hit? Not according to economists at Salomon Smith Barney.
Solly's experts note that since 1994, saving as a share of pretax personal income has declined by only two percentage points, from about 17.5% to 15.5%, whereas saving as a share of aftertax income--which is the way the official savings rate is calculated--has dropped by more than six percentage points. The reason for the difference is that the average tax rate on personal income rose by about 3.5 percentage points over the same period (chart).
Influencing the rise in the tax rate, however, are certain peculiarities in the way it is calculated. For example, it includes capital-gains taxes, even though such gains aren't counted as part of personal income. Shifts in gains realizations and other factors in recent years have driven the reported tax rate higher.
This helps explain why consumption hasn't tanked in spite of the negative savings rate. Rather than aftertax personal income, consumers are keying their spending to pretax personal income, which has held up relatively well. While that relationship continues, says Solly, any retrenchment in spending is likely to be modest and gradual, rather than sudden and sharp--whatever the official savings rate is saying.