Productivity push: companies aim to increase profits without new hires.

Is the wait finally over?

After several years of sluggish growth and stock market doldrums, terrorist scares and corporate scandals, the economy appears to be on the verge of real growth.

Though 2003 began with the war in Iraq and mixed economic signals, the second half of the year witnessed a solid rebound in stock prices, productivity and corporate earnings.

Market watchers are giddy about a "second leg" of the current bull market, while executives anticipate a year of record corporate profits.

Left out of the equation, however, has been the kind of growth--specifically job growth--that normally comes with any expansion. L.A. County unemployment still hovers around 7 percent and UCLA's Anderson Forecast projects that California will add just 134,000 jobs next year, a growth rate of less than 1 percent (and actually a bit higher than the projections for the nation).

That leaves companies confronting the prospect of trying to expand again without major plans to hire new workers.

They're doing it in many cases by shifting jobs overseas in the inexorable push toward globalization, and by investing in business software and equipment to further increase productivity and cut costs.

Employment has always been a lagging indicator of the economy, but some economists see structural changes at the heart of the current "jobless" turnaround. That means a greater reliance on temporary workers, major cutbacks in employee benefits, and a continued decline in the manufacturing sector.

"We are seeing a recovery without job growth but with a rebound in profits and in non-manufacturing sectors," said Michael Fishman, executive vice president and national director of loan originations at Wells Fargo Foothill, as asset-based lender in Santa Monica.

There are certain factors that could keep a lid on expansion next year. The dollar continues its free fall. The war in Iraq and terrorism continue to be ongoing threats. And the two towers of the massive trade and federal budget deficits--not to mention the California budget debacle and its ensuing costs--are holding back certain sectors.

Nevertheless, Fishman said dealmaking in the fourth quarter has picked up dramatically and he expects robust merger and acquisition activity in 2004.

"In the technology arena, companies are exporting jobs overseas to China, India and Russia, which has allowed them to improve the bottom line even without revenue growth" he said. "It's an interesting recovery because much of the improvement is coming from getting costs under control."

What may not be good for workers has been a boon for corporations.

The Bureau of Economic Analysis, the arm of the Commerce Department that also calculates gross domestic product, revised corporate profit numbers upward by nearly $130 billion for the third-quarter ended Sept. 30, to $869.7 billion. That represents a 25 percent jump in corporate profits from $700 billion in the like quarter a year earlier.

A rebound in business spending this year, primarily in computer software, accounts for the surge. While the housing sector cools off, some industries like hospitality and travel, technology and software, as well as defense are showing solid gains.

Aerospace rebound

Christopher Thornberg, senior economist at UCLA's Anderson Forecast, projects the addition of 263,000 non-payroll jobs in L.A. County for 2004, a 1.6 percent increase. Job growth was stagnant this year with a loss of 18,000 jobs alone in the fourth quarter.

"It certainly isn't a rebound, per se," Thornberg said. "The weakness of the state government budget problems and the manufacturing sector are the big issues."

Even so, Brett Meinsen, vice president of finance and administration for Reinhold Industries in Santa Fe Springs, expects a stronger 2004 with an increase in spending that's related to the national missile defense program. Reinhold expects the biggest increase in revenue from the Minuteman missile, the 650 nuclear weapons that are sitting in silos across the country to defend the U.S. against a nuclear attack.

The company provides propellants and installation components for the Minuteman, which is undergoing a major retrofitting approved by Congress years ago.

"We expect $13 million to $15 million a year on programs through 2007 related to the Minuteman," Meinsen said, adding that another Reinhold unit providing aircraft seat frames to the commercial airline industry is unlikely to turn around until late 2005. "We've seen a substantial decrease in that business over the last few years because of what Boeing and the airlines are going through."

Peter Conley, managing director of MDB Capital Group LLC in Santa Monica, said a strategic shift has taken place in the past two years, with companies cutting debt, laying off workers and containing costs.

"Now we're seeing CEOs and boards redirecting their spending and budgets towards growth," he said, adding that investments in information technology, network security, data storage and private networks have captured a large chunk of research and development dollars.

The flip side is the lackluster performance of the dollar.

While the stock market gains for the trailing 12 months appear strong, with the Dow Jones Industrial Average up 17.4 percent and the Standard & Poor's 500 Index up 18 percent, both major indices have suffered declines when recast against the euro.

"It looks like we had a great year but the question is, will the foreign investor be back in 2004 for a repeat performance?" asked Conley. "How sustainable is the performance of the market if, adjusted to the euro or the yen, foreign investors are losing money and we need $1.5 billion a day in long-term capital inflows?"

If you believe, it will come

At the heart of this recovery is a sentiment among high-end investors that 2004 will be a strong year.

A survey in November found that more than 70 percent of California residents with invested assets of $100,000 or more believe the economy and the stock market would perform better next year compared with this year. The survey of 680 Californians was conducted by Nuveen Investments.

Bernard Zaia, managing director at Barrington Associates, said that more companies are coming to the table for a variety of deals. He referred to one business-to-business firm that is spending an additional $6 million over the next 18 months to save on operating costs.

Still, much of the information on capital spending is anecdotal because no group tracks spending on a regional basis.

"For a good period of time, people were holding onto their wallets, but now companies are becoming more efficient by spending on technology," Zaia said. "We're starting to see companies returning to make capital expenditures. Lots of productivity gains have been achieved by technology and now they're trying to return to a pattern of growth."

The much-beleaguered manufacturing sector received a jumpstart last month, according to the Institute for Supply Management's purchasing manager's index, a gauge of the manufacturing economy that takes into account new factory orders and production, which jumped to 62.8 percent in November to a 20-year high.

"Everything looks real good when it comes to the economy but technically we have not had a quick rebound in employment that often accompanies this kind of growth," said Dawn McLaren, an economist at Arizona State University's Bank One Economic Outlook Center, which publishes the Western Blue Chip Economic Forecast.

Joseph Magaddino, an economist and chairman of the department of economics at Cal State Long Beach, said his forecast shows negative job formation for the region, though some of that is coming from Northern California, which has lagged behind Southern California because of the technology bubble that burst in 2000.

"The bad news is we don't see any positive growth in 2004 in manufacturing, though we are seeing productivity gains," Magaddino said. "Next year is not going to be a great year, but it's a year where we're moving back on track and 2005 will be much stronger for the region."