US companies may be hiring but lid on wages, investment hits productivity

As the Federal Reserve puzzles over what is holding back U.S. wages and productivity six years into the economic recovery, a pasta sauce company in New Jersey may offer some answers.

Chelten House Products makes private-label sauces and dressings for high-end grocers such as Whole Foods, Trader Joe's and Kroger, and has doubled its workforce to 300 over the past five years to keep up with a booming organic food market.

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Now it is struggling to hire not just skilled mechanics or electricians but even workers who handle the jars rolling down its conveyer belts. Chelten CEO Steve Dabrow says factory work is becoming a harder sell with unemployment down at a seven-year low of 5.3 percent. "You're not sitting down, you're standing on your feet all day, you're not taking breaks, and bottles are flying down the line," he said.

A workers sprays a powder coat onto bicycle parts at the Detroit Bikes manufacturing facility in Detroit, June 25, 2015.
Ty Wright | Bloomberg | Getty Images

The Bridgeport, New Jersey, company, which hired 60 people just last year, is not bidding up wages much for anyone save those with very specialist skills because, for now at least, it still manages to fill the vacancies. It has made some strategic capital investments, such as in a more automated new plant in Las Vegas in 2013, but has more recently focused on expanding by taking on additional workers.

Like other U.S. manufacturers for whom the 2007-2009 recession is fast-fading, this company's story of brisk hiring, limited wage hikes, and some capital investment helps illustrate why the otherwise mostly rosy U.S. labor market is marred by low wage growth and sinking productivity.

Interviews with several heads of small and midsize companies, together with results from employer surveys and data on labor costs, indicate that while companies are prepared to hire more workers, they do not feel the need to raise wages significantly or have the confidence in the economy to make big capital investments. This is good for the job numbers but it is restraining productivity and economic growth.

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Dabrow and managers at other U.S. manufacturing companies say they often need to bring on workers who lack the experience or dedication of those hired in 2009, when U.S. unemployment peaked at 10 percent. That means a lot of on-the-job training and staff turnover that may keep U.S. productivity, or output per worker hour, from rebounding quickly from its first back-to-back quarterly drop since 2006.

Shy about spending

How soon and how strongly wages and productivity rebound will influence Americans' standard of living, and have a big effect on the inflation rate and economic growth. As a result, it will help the Fed determine whether to raise interest rates for the first time in nine years in September or later.

September is very much still in play: Strategist
September is very much still in play: Strategist

Fed officials are assuming there will be a rebound in productivity through innovation or investment in labor-saving technology like robotics, and that this will boost economic growth to around 2.5 percent next year. They also don't expect the jobless rate to fall much further through the end of this year.

But if productivity remains weak it could push the inflation rate higher and lead to a more aggressive policy tightening in the months and years to come. "Overall productivity has been disappointing," Boston Fed President Eric Rosengren told Reuters in a recent interview.

Manufacturing, where productivity fell by 1 percent in the first quarter compared with 3.1 percent economy-wide, should be at the forefront of the expected investment-driven bounce. But in a closely-watched proxy for investment, shipments from American factories of civilian capital goods other than airplanes rose only 0.6 percent in June from a year earlier, suggesting businesses are still shy about spending on anything beyond hiring.

While many industrial giants like Caterpillar have been squeezed by the strong dollar and weak overseas markets, triggering job cuts, smaller U.S. firms are in better shape. With less overseas exposure and accounting for 60 percent of job gains since the recession, they are planning to spend and hire more, according to a June survey by the National Federation of Independent Business.

For example, Gray Construction CEO Stephen Gray hired 67 people over the past six months to bring the workforce of his Lexington, Kentucky-based company up to 375. But he said wage increases were reserved only for the highly skilled workers, who made up about a third of new hires.

The company designs, engineers and manages building of factories for the likes of Toyota Motor Corp and Caterpillar, and Gray sees a "green light" for manufacturing until at least 2018 thanks to resilient U.S. consumption and, despite recent weakness, productivity that still tops that of European rivals.

But that doesn't mean it is spending heavily on new equipment.

"When we roll the dice it's on people," Gray said. "We're not buying robotics, we're not buying big software systems."

Wage growth tepid

After some tentative gains in recent months, U.S. wages were steady in June, with the average inflation-adjusted pay of manufacturing production workers, at $8.49 an hour, the same as it was in 2007, and little above the $7.25 an hour federal minimum wage.

A measure of employment costs, which also includes health and pension insurance, also stalled in the second quarter, though the weakness was not expected to last, according to economists and policymakers.

Tepid wage growth helps explain the productivity slump, says Mark Zandi, chief economist at Moody's Analytics. "It's been cheaper for companies to expand by hiring people rather than investing," he said. But once wages start rising, investment and productivity should pick up, he added.

Small business hiring in US is gaining ground
Small business hiring in US is gaining ground

D'Addario, which makes guitar strings and other musical instrument accessories, reflects the sober views that many manufacturers' have about the economy.

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The strong dollar forced it to cut prices in its export markets in Europe, Brazil and Australia. Rather than scale-back, the Farmingdale, New York-based company decided to cut imports of materials to save on shipping costs and to ramp up in-house local production, its president John D'Addario III said.

Faced with growing staff turnover, the company has chosen to lure new workers by stressing the benefits it offers rather than raising wages that start at $9.75 an hour.

Some executives simply doubt the world's largest economy can do much better than the 2.3 percent annualized growth it recorded in the second quarter.

For the 350 employees of Millerbernd Manufacturing in Winsted, Minnesota, which makes heavy metal rings, cylinders and street-lighting poles, wages in step with inflation are the order of the day, says chief operating officer Rob Tracy.

"We're operating on the assumption that this flat economy is the new normal," he said.