width=300Anyone puzzled by the reluctance of U.S. companies to hire workers in the midst of what looks like a business-led recovery needs to talk to Robert Harvell.

With more than 30 years in the excavator-making business and six recessions under his belt, Harvell, the chief executive of LBX Company, thought he knew what to expect when he saw signs in late 2006 that another downturn was coming.

He was wrong. So now, like a lot of manufacturing executives surprised by the downturn's speed and severity, he is being extra cautious, especially when it comes to expanding his pared-down payroll.

Signs of how wary U.S. employers are to hire again are expected with Friday's release of payroll figures for July.

Like Harvell, many executives worry the current recovery will prove as unpredictable as the recession that preceded it.

I am embarrassed to say that we anticipated a softer landing and a speedier recovery than what we've seen, he told Reuters this week. But then everything began to implode.

The U.S. economy has posted four consecutive quarters of growth. Yet the unemployment rate remains close to 10 percent, in part, because companies are holding the line on hiring.

Their wariness is impacting the U.S. economy, weighing on consumer confidence and making President Barack Obama's economic stewardship a top issue in November's mid-term elections that could tip the balance of power in Washington.


If that sounds like a lot of responsibility to lay at the feet of the folks who run America's factories, consider this: while manufacturers account for only about 12 percent of U.S. GDP, they handed out 25 percent of the 8 million pink slips generated during the downturn.

Last year alone, the sector shed 11.4 percent of its workforce -- the largest one-year percentage drop in manufacturing employment since the Great Depression, dwarfing even the 10.4 percent drop seen in 1945, when America's victorious industrial war machine throttled back production.

Manufacturers are now moving far more slowly to bring workers back. As of June, industrial firms had hired back fewer than 10 percent of more than 2 million workers they laid off during the downturn, the Bureau of Labor Statistics says.

Another contributing factor to the paralysis in payrolls: Many manufacturers used the downturn to speed up efforts to restructure, streamline operations and slash costs.

We looked at the P&L and said 'How do we attack each line, and make it more robust, more productive and cut the waste out of it?' said Chuck Evans, a top executive at Henkel Corp's U.S. automotive business.

Painstakingly and line by line, we made the organization reinvent itself.

That means the companies can handle the return of demand for their products, and post fat profits, without having to hire a lot of permanent workers.

This recovery, in other words, could be as different from past pickups as the recent downturn was from recessions past.


In the early stages of what turned out to the deepest U.S. downturn since the 1930s, LBX did what it usually did: reduce headcount through attrition and cutting back inventory.

A 17 percent fall in business in 2007 was followed by a 28 percent slump in 2008 and a 48 percent crash in 2009.

In December 2008, LBX -- which co-designs its Link-Belt brand excavators with parent company Sumitomo Heavy Industries and adapts them for North America -- decided on a one-time layoff that cut staff to a core team of 80 from 100.

We could not let any of that core team go because everyone here performs multiple functions, Harvell said. Also, most of our people have 20 years or more experience and replacing them would not be easy. We couldn't let those people go.

LBX figured its core team could handle up to a 30 percent increase in demand before it needed to expand its workforce.

So far, LBX's sector is only up about 5 percent this year. Harvell expects demand could rise 15 percent next year but even then he may not start hiring before the end of 2011.

This is not like any recovery we've ever seen, he said. And the credit markets are still constrained. We are seeing some bright spots out there and it's going to get better, but we're not ready yet to expand.


It's not that manufacturers aren't hiring. Employment in the sector is up for six straight months now, the BLS says.

But U.S. factories have only brought back 136,000 of the 2.2 million workers they laid off between December 2007, when the recession officially began, and December 2009, when they stopped cutting and started cautiously hiring again.

That pattern shows up across the economy. The jobless rate peaked in October 2009, just a couple of months after economic growth resumed. That was a much quicker turnaround than the so-called jobless recoveries following the 1991 and 2001 recession, when unemployment finally peaked more than a year after the downturn ended.

But private hiring has been so tepid -- averaging slightly more than 100,000 a month so far this year -- that at this rate it would take more than six years to replace the jobs lost during the recession.

Caterpillar Inc, the Peoria, Illinois-based maker of construction and mining equipment, provides a particularly dramatic example of the manufacturing sector's wary response to the rebound.

When its sales took their largest one-year tumble since the 1930s, dropping 37 percent to $32.4 billion in 2009, it laid off nearly 30,000 workers worldwide, 19,000 of them full-time.

In 2010, sales have rebounded smartly and are expected to end the year somewhere between $39 billion and $42 billion -- roughly halfway back to 2008's all-time record sales levels.

Yet Caterpillar has rehired fewer than 20 percent of the full-time workers it laid off -- just 3,600 people worldwide in all. And only a third of those have been in the United States. That brings the company's total headcount to 97,000, right about where it was back in 2006 when it had sales of $41 billion.

Caterpillar has said it hopes to rehire a total of 9,000 workers this year. But again, only a third of the promised jobs will be inside the United States as the company continues to align its manufacturing footprint and headcount with its sales, 62 percent of which now come from overseas.


Smaller manufacturers are doing much the same thing.

According to Sageworks, which compiles data on the finances of privately held businesses, they are working hard to lower their break-even points by trimming costs and holding back hiring because they are unsure the recovery has legs.

They're being defensive, said Sageworks executive Drew White, pointing to payrolls-to-sales ratios.

In 2007, manufacturers, on average, paid out $13.26 in salaries, wages and benefits for every $100 of sales, according to Sageworks. Since then, the number has fallen -- a function of both shrinking payrolls and reduced compensation -- and so far in 2010, it has dropped to about $9.29 for every $100 in sales, a 30 percent decline in just three years.

White said some of that is due to strategic understaffing by smaller manufacturers, which tend to experience the rebound later than their larger industrial peers.

The good news is if manufacturing is growing at the bigger companies, it will eventually hit the smaller firms, he said. And when they do see a comeback in revenue, I think they'll be very quick to hire back.

But much of what's going on is permanent. Since peaking in 1973 at 18.8 million, U.S. manufacturing employment has fallen pretty steadily, a function of industry's effort to stay competitive by effectively replacing people with machines.

Most economists think less than half the U.S. manufacturing jobs lost over the past two years will ever return -- even if the current recovery gains traction and strength.

Adam Fleck, an industrial analyst at Morningstar, is more optimistic. He doesn't see the sector recreating the nearly 7 million jobs lost over the last 37 years but he thinks it could eventually go back to levels seen before the recession.

But whether it's next year or the year after that or at the top of the next cycle, he said, it's hard to say.

(Additional reporting by Emily Kaiser)

(Reporting by James B. Kelleher and Nick Carey)