Rising worker productivity, innovation boosts profits but may lessen hiring need

By Anthony Feld and Craig Torres
Friday, November 26, 2010; 9:59 PM

MAXTON, N.C. - Not far from where Federal Reserve Chairman Ben S. Bernanke grew up, a revolution inside a Campbell Soup Co. plant explains why corporations are piling up profits - with little need to hire more people.

Workers such as "Big John" Filmore, a 28-year Campbell veteran, huddle every day with management in situation rooms before their shifts to find ways to save money for the company. Rising productivity is helping boost profit margins here in Maxton, where 858 workers turn out a billion meals a year, and at most of the 243 non-financial companies in the Standard & Poor's 500-stock index with rising profit margins.

Companies slashed 8.5 million jobs during the worst recession since the Great Depression while also slowing capital investment plans. Campbell, the world's largest soup maker; DuPont, the country's third-biggest chemical maker; and United Parcel Service, the world's largest package-delivery business, are asking workers to help save cash by working smarter with existing technology. A potential cost: Efficiency gains reduce the chances that recession-casualty jobs will come back.

"When the productivity growth comes, then watch out because that is when companies start not needing so much labor," Edmund Phelps, a Columbia University economist and Nobel laureate, said in an interview.

Growth in productivity, or output produced in an hour of work, averaged an annualized 3.4 percent in the five quarters since the 18-month recession ended in June 2009. That is similar to the 3.7 percent gain in the first five quarters after the 2001-03 so-called jobless recovery.

The efficiency gains have paid off in corporate profits. Earnings from continuing operations of companies in the S&P 500 have rebounded 23 percent since the fourth quarter of 2007. Sales have declined 9 percent over the same period.

Research by San Francisco Federal Reserve Bank Vice President John Fernald and senior economist Daniel Wilson shows a striking difference in the sources of today's productivity gains from those during the recovery at the beginning of the decade.

Wilson concluded that so-called total factor productivity, which may capture gains from innovations in the way workers perform tasks and a more intense use of capital, rose at a 2.9 percent annual rate in this recovery, almost a percentage point more than in the last recovery. The data suggest companies are using the equipment they have more intensively and intelligently, Wilson said in an interview.

"There is a big story in why we in the U.S. have been so innovative," former Fed chairman Alan Greenspan said in an interview. "American business for generations has sought ideas from the shop floor. We learn from everybody in the operation, not only from the plant hierarchy."

Phelps says productivity growth works in long waves. In boom times, companies stock up on equipment. In lean times, they find ways to maximize performance of that equipment.

That's a challenge for Bernanke, who grew up in Dillon, S.C., about 26 miles from the Maxton plant. The economy's 3.7 percent annual rate of expansion in the first quarter was the second-strongest of the recovery so far.

Yet data released last week by the Bureau of Labor Statistics show that while firing has slowed, hiring hasn't picked up. Job gains from new or expanding businesses were 6.1 million in the first quarter, the lowest quarterly increase since the recession ended. Job losses from closing or shrinking businesses fell to 6.4 million, the smallest on BLS records going back to 1992.

U.S. corporations "live in a perpetual state of recession" because of fierce global competition, said Tom Schneider, chief executive of Washington-based consultant Restructuring Associates, which helps boost efficiency at such companies as consumer goods maker Unilever. They have "no expectation that this is a short-term blip."

Unemployment in Robeson County, which hosts the Maxton plant, was 11.1 percent in September. The factory sat near a town center with a dry fountain last month, and a clock on the town hall told the wrong time.

Dave Biegger, vice president of Campbell Soup Co.'s North America supply chain, says the reward for workers' contributions to efficiency is a stable job and more business.

On a new Swanson broth line at the Maxton plant, equipment operators, working with the line's mechanics, have numbered each gasket to avoid confusion and speed up repairs. They've cut windows into machinery covers so they can see wear on the belts, replacing them before they break, as well as color-coded valve handles to avoid confusion in settings.

"We have to collaborate at the highest levels of the organization right down to the plant floor," said Biegger, who built a 20-person team whose sole aim is to find cost improvements. "You explain, you teach, you coach, and then you allow the work to evolve through the creativity and commitment of the team. And then we push ourselves to stretch beyond what we believe is possible."

Before every shift, the Campbell staff steps out of the whine of machinery and the ever-present odor of chicken broth and huddles with management in 11 situation rooms. Performance metrics and repair issues are written on white boards, and teams discuss how to get fixes done quicker or how to improve a process.

The daily huddles are about "getting everybody involved," said Filmore, who stands 6 feet 4 inches tall, as he walked out of the kettles of a soup- blending operation wearing a hair net. "Instead of being told what to do, we get to tell people about our problems."

Greenspan said the companies need to keep innovating or the current burst of cost-saving will run its course and profit margins will shrink.

"When markets shut down, and capacity expansion comes to a halt, companies direct all of their capabilities toward harvesting untapped cost-saving innovations accumulated during the previous boom," said Greenspan, who now works as a private consultant in Washington. "We have been experiencing this harvesting for a year or so. You have to ask the question: Are we running out of backlog?"

- Bloomberg News

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