Recession question misses the point

(Fortune) -- The lesson from Wednesday's economic numbers is that even a mild slowdown can inflict plenty of damage on workers.

The government's initial estimate of first-quarter economic activity shows a 0.6% rise in real gross domestic product. The numbers, released Wednesday morning by the Commerce Department's Bureau of Economic Analysis, show the economy is growing at the same sluggish pace as it did in the fourth quarter.

Though the first-quarter GDP number is due to be revised twice in coming months as the government gathers more data, the early reading is that the United States continues to skirt a recession, at least if you use the common definition of a recession: two straight quarters of GDP contraction.

But another piece of information out Wednesday, the ADP National Employment Report, shows just how little solace workers can take in the economy's success in steering clear of recession.

Private-sector employment rose by just 10,000 jobs in April, on top of a revised 3,000-job gain in March, ADP said. If those wan numbers aren't depressing enough, consider that the economy was adding an average of 195,000 jobs a month as recently as the end of 2006.

"Though April's estimate for a small increase in employment is above consensus forecasts of an outright decline," says Joel Prakken of Macroeconomic Advisers, the consulting firm that prepares the data for ADP, "it nevertheless suggests that a sharp deceleration of employment continues."

Most of the latest month's gains came from small businesses -- those with fewer than 50 workers -- in the service sector. Manufacturing employment fell by 26,000 jobs in April, marking the 20th straight decline in that sector. Construction jobs dropped by 28,000, marking their 17th straight decline. That sector, hit hard by the housing bust, has shed 288,000 jobs since housing prices peaked back in mid-2006.

The steep declines in those kinds of jobs, which often offer better pay than service-sector jobs created by small businesses, point to significant pain being felt by workers. Take the weak employment figures and falling house prices, and you have a recipe for a sharp pullback in consumer spending -- which, accounting for nearly 70% of economic output in recent years, has been the driver of U.S. growth since the last recession in 2001. No wonder consumer confidence has been hitting lows last seen five years ago.

"The recession can stay in the closet as long as we have the space to stuff unsold and unused goods," says Janet Tavakoli, president of Tavakoli Structured Finance in Chicago. "But does anyone really think that the U.S. economy is not in a recession when consumers cut back on spending and feel the negative wealth effect of lower housing prices?"

The loss of manufacturing jobs is nothing new, of course. But the sustained decline in manufacturing-sector employment is notable in part because one of the economic success stories of the past 12 months has been the rise of the U.S. export sector. Sales to trading partners overseas have been spurred in part by a weakening dollar, which makes U.S. goods cheaper abroad.

"We know exports of goods are booming," Prakken says. "But we don't know directly how that's affecting employment," he adds, because exporters have also benefited from rising productivity and other factors.

Take Caterpillar (CAT, Fortune 500), the Peoria, Ill., tractor maker. The company said earlier this month that its first-quarter profit reached a record level, driven by a 27% surge in export sales. Exports accounted for more than a quarter of Caterpillar's $45 billion in sales last year. Still, CEO Jim Owens knows it's imperative to continue sharpening the company's focus.

"We still have a lot of room to improve in terms of manufacturing, labor and overhead costs," he said back on an April 18 conference call with investors. "We're thinking we're doing the right things to drive that improvement and we do expect it to improve as we move through the year."

That doesn't mean Caterpillar hasn't been hiring. Caterpillar said earlier this year that it added 7,000 jobs worldwide in 2007, while it has boosted U.S. employment by 14,000 jobs since 2002. About half of the company's 100,000-plus workers are based in North America. But because of its focus on efficiency, Caterpillar may not be hiring as much as its booming sales numbers would suggest.

And cost-cutting is hardly unique to Caterpillar. Take General Motors (GM, Fortune 500), which on Wednesday posted a $3.3 billion loss. GM said earlier this year it would curtail production at four North American plants to reflect slowing demand for cars.

Motor vehicle output subtracted 0.30 percentage point from the first-quarter growth in real GDP, the Commerce Department said Wednesday, after subtracting 0.86 percentage point from fourth-quarter growth. For U.S. workers, that's a real drag.