Roach's latest screed (that was the description Meehan used once, it fits Roach pretty well<G>):
morganstanley.com
Global: Unmanageable Bloat
Stephen Roach (New York)
In the face of one of the steepest earnings recessions in modern history, you would think that Corporate America would spare nothing in its newfound zeal for cost cutting. And to a large extent, few stones have been left unturned. Capital spending budgets have been slashed, inventories liquidated, and headcounts have been trimmed. But one key element of the corporate fiefdom has remained largely unscathed during this recession -- the vast legions of managers and executives who run the companies. This is very much at odds with what I have expected to occur in this recession (see my 23 May 2001 dispatch, "Coming to Grips with Managerial Bloat"). But I still believe the case for a managerial shakeout is compelling -- an outcome which could prove problematic for any economic recovery.
The persistence of managerial bloat remains a unique feature of this business cycle. Believe it or not, in 2001 -- a recession year -- managerial employment in the total nonfarm economy surged by 2.9%. Not only does that represents a virtual tripling from the 1.0% gain in 2000, but it stands in sharp contrast to the -0.4% decline in managerial employment that occurred during the last recession in 1990. As a result, the managerial content of the workforce -- which includes executives, managers, and administrators -- rose to 15.3% of total nonfarm employment in 2001. That’s a record high -- more than 2.5 percentage points above the 12.7% portion in 1990 and even further above the 11.0% reading back in 1983, when the occupational data were first tabulated on a consistent basis.
Last year’s surge in managerial hiring stands in sharp contrast with employment trends elsewhere in the US labor market. Indeed, the non-managerial portion of the overall workforce actually contracted by 0.5% in 2001, hardly surprising for a recession year. Blue-collar workers bore the brunt of the cyclical contraction, with a 2.0% drop in headcount; moreover, job gains slowed appreciably in the so-called service-worker category to just +0.5% in 2001. Even the non-managerial portion of the white-collar workforce -- professionals, sales workers, technicians, and administrative support -- was essentially unchanged last year following a 1.2% increase in 2000. This latter trend points to an important shift in the occupational content of the white-collar workforce: Managers now make up a record 25.1% of total white-collar employment in the nonfarm US economy, fully three percentage points higher than a decade ago. That’s right, one out of every four white-collar workers in America is currently a manager!
It’s not hard to figure out where the counter-cyclical surge in managerial hiring occurred in 2001. After all, 71.2% of all managers are currently employed in the labor-intensive private services sector. Within services, last year’s increases were concentrated in entertainment (+8.4%), education (+6.1%), healthcare (+4.6%), business services (+4.6%), financial services (+3.8%), and retail trade (+3.6%). Collectively, these six industry groupings accounted for 71% of the total rise in managerial hiring in the nonfarm economy in 2001 -- well in excess of their combined 44% share of overall payrolls. By contrast, managerial headcount was reduced in several key industry groupings last year -- notably manufacturing (-2.7%), telecommunications (-2.9%), and public utilities (-3.0%).
Particularly disconcerting, in my view, has been the failure of Corporate America to reduce the top-heavy managerial content of the white-collar function. To me, one metric says it all -- the shifting mix of the white-collar workforce away from high-value-added content providers (professionals) toward overhead (managers). For the total nonfarm economy, the ratio of managers to professionals was unchanged in 2001 at 0.94, essentially holding at that lofty level for a third year in a row. In and of itself, that’s an astounding statistic -- more than nine managers for every ten professionals in the overall economy! But even more astounding is that this ratio didn’t budge at all in a recession year. Again, this stands in sharp contrast to the pattern of the early 1990s, when the ratio of managers-to-professionals fell steadily in recession and into the first two years of recovery. Interestingly, the manager-to-professional ratio fell in all but three major industry groupings in 2001 -- construction, trade (wholesale and retail, combined), and financial services. And wouldn’t you guess it -- of those three, by far the sharpest increase occurred in the finance sector.
It’s quite perplexing as to why managerial hiring surged so much in a recession year, especially when cost-conscious businesses were supposedly fixated on purging excesses from their operating structures. I suspect that a lot of the incremental managerial staffing is traceable to the legacy of the New Economy -- namely, the perception that increasingly complex organization require new and expanded layers of management to execute productivity-enhancing strategies. Moreover, with new information technologies spawning companies and industries of great scale and scope, there seems to be a growing perception that management can play a more vital role in facilitating the delivery of value-added content. If that’s not an antiquated holdover from the bubble, I don’t know what is. It tells me that the size of managerial hierarchies was scaled to fit the late 1990s. Barring a return to that trend -- an outcome that gets a low probability, in my view -- a rescaling of the managerial ranks is in order.
The more immediate problem is that managerial hiring expanded so sharply during a recession -- when there is usually the greatest premium on cost containment. And that, I suspect, is what is now about to change -- especially in the context of persistently sluggish earnings for Corporate America. Consequently, any efforts to boost profit margins could well entail a managerial shakeout, strikingly reminiscent of that which occurred in the early 1990s, when the ranks of American managers fell by about 1% over the three-year period, 1990-92. Needless to say, if that were to occur, it would represent a serious setback for the American job machine. After all, managerial hiring accounted for fully 33% of total US job creation over the past three years -- the single largest occupational driver of overall employment growth.
If this key source of job creation goes the other way and turns into a net drag, national unemployment could then keep rising into economic recovery for much longer than is normally the case. That would actually mirror the outcome of the early 1990s, when the jobless rate kept drifting up nearly two years into recovery -- rising from 7.2% at the recession trough in March 1991 to a peak of 8.2% in February 1992, and then essentially holding there for another year. If that’s what’s in the cards for today’s US economy, then the coming managerial shakeout could well prove problematic for the over-extended American consumer -- and for the sustainability of any recovery in the overall economy. |
