Why job market stays tough

Economy grows, but oil prices, war, and debt weigh heavily. A test for CEOs, next president.

Businessman Edward Foy Jr. has made so many changes to his budget for next year it's beginning to look like one of those complicated plays from a sandlot football game.

Add a new executive vice president for the company, eFashion Solutions. No, wait on that. How about a new warehouse automation system? No, maybe it's better not to spend the money and stick with the workers who know where everything is.

This zigging and zagging reflects Mr. Foy's uncertainty about the economy, something that is shared by many business executives. For the next US president, a key challenge will be to convince these executives that it's safe to add to the payroll and grow the company.

It will be an uphill task, given that economists anticipate the business climate will be losing steam: Oil prices are expected to take a larger bite out of corporate profits, and the Federal Reserve may still be raising interest rates, which may contribute to a slower pace for housing construction.

"The economy will definitely slow down next year because of the negative head winds and higher energy costs," says Anthony Chan, chief economist at JPMorgan Fleming Asset Management in Columbus, Ohio.

At the moment economists don't expect the slowdown to degenerate into a recession. Instead of growing at 4 percent or more, the conventional wisdom is that the economy will see more modest growth of 3.5 percent. However, the "Probability of Recession Index" on Economy.com is rising and now sits at 27 percent, up from 3 percent last November.

"The leading indicators have yellow signals, if not red, for next year," says Mark Zandi, chief economist at the website. "The economy is going to be struggling in the first part of the president's term."

Indeed, some economists are beginning to scale back their estimates for next year. "A growth rate in the 2s is a possibility," says Lyle Gramley, a former Fed governor who is now with the Schwab Washington Research Group. "So far we haven't had much of an effect from the rising price of oil, but I think it's coming."

Some economists believe that the best effect the president can have on the economy is actually in the foreign-policy sphere. "If he can influence the production of oil or lower geopolitical tensions and the threat of terrorism, it will be more important," says Sung Won Sohn, chief economist at Wells Fargo Banks in Minneapolis.

It may also be easier to focus on foreign affairs. "The US economy is like an aircraft carrier: You can turn it around but not right away," says Mr. Sohn.

For example, the president and Congress will find it difficult to increase spending with the budget deficit projected at $425 billion this fiscal year and $375 billion next.

But the president will probably want to spend more money because it's anticipated that the unemployment rate will start to rise modestly next year. Tuesday, Challenger, Gray & Christmas said that companies had announced 101,840 layoffs in October - a slightly lower number than September. "I'm not hearing anyone with great hiring plans right now," says John Challenger of the Chicago-based outplacement firm. "A lot of companies are in the wait-and-see mode."

One of those would be MyBizOffice Inc., which does support work for self-employed professionals. In the past few years the company has doubled its business while only adding 5 to 10 percent more workers. Gene Zaino, the company's CEO, says he has reached the point where he can't get much more productivity gains out of his staff.

Mr. Zaino notes that his customers are also unsure about the economy and have become very conservative in their hiring practices - which mean more business for him, since companies will resort to short-term contracts to get the work done. "I think what is happening is that companies are saying instead of being 100 percent committed to full-time workers, they want 10 percent of their workforce to be flexible, and we are that flexibility," he says.

Flexibility would certainly be the watchword at Foy's company, eFashion Solutions, in Secaucus, N.J. It designs websites for and markets and warehouses celebrity-based products such as Jennifer Lopez T-shirts. Their first quarter was much stronger than the company anticipated, but then sales tailed off, reflecting higher interest rates and rising oil prices.

In fact, some economists think consumers are now eating into their savings. This would not bode well for retail sales.

Such forecasts, including declining consumer confidence numbers, have made Foy cautious. "Now, we're going to go forward very conservatively," he says.

But one of the bright spots for the economy next year will be the South, where construction workers will be in demand to help repair the mess left by this fall's hurricanes. Mr. Chan estimates the work will provide 500,000 new jobs - almost half the number of new jobs created this year.

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