Slow Growth Amid Sluggish Job Gains

The U.S. economy slowed more than initially thought in the first quarter amid smaller gains in consumption and inventories, while corporate profits picked up. Separately, two measures of the labor market indicated continued sluggish job growth.

Gross domestic product increased at a 1.9% annual rate from January through March, the Commerce Department said Thursday. In its original report a month ago, the department estimated an increase of 2.2% in first-quarter GDP, the broadest measure of all the goods and services produced in an economy.

The number of U.S. workers filing new applications for unemployment benefits jumped last week, a potential signal that job creation continues to slow. Meanwhile, Private businesses hired at a very modest pace in May and manufacturers let go of workers, according to a report released Thursday by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers.

Still, companies registered their biggest quarterly gain in profits since the end of 2009 in the first three months of 2012. Corporate profits—after tax and unadjusted for inventories and capital consumption—increased at an 11.7% annual rate from the previous quarter. Profits were up 14.8% year on year in the first quarter, Commerce said.

The economy has cooled off since expanding at the fastest pace in a year and a half in the final quarter of 2011, with a 3.0% growth rate. But the fourth-quarter acceleration was driven partly by companies aggressively restocking inventories to catch up with demand.

Thursday's report showed that the inventory buildup was even less than expected in the first quarter, with the contribution to GDP falling to just 0.2 percentage point from 0.6 percentage point.

Consumer spending was also slightly weaker than expected, rising 2.7% instead of 2.9% as initially thought. Still, that marked the biggest gain in consumption since the fourth quarter of 2010.

Meanwhile, government spending continued to weigh on the recovery, with the drop revised down to 3.9% from 3.0%, mostly on the back of weakening state and local finances.

An unexpected pickup in business spending helped to partially offset downward revisions elsewhere, with investment in areas like software and industrial equipment rising 1.9%. Nonresidential fixed investment was initially estimated to have declined 2.1% in the first quarter.

Last month, Federal Reserve lifted its forecast on growth for this year, to between 2.4% and 2.9%. But Fed Chairman Ben Bernanke warned after the policy-setting meeting that "it's a little premature to declare victory."

One lingering uncertainty is whether the moderate pace of growth would be enough to bring down unemployment and spur demand. Friday's monthly employment report is expected to show a modest pickup in job creation, with the addition of 155,000 nonfarm payrolls in May. But the unemployment rate is expected to remain at 8.1%.

Another concern is the recent flare-up in inflation, though the most recent data have largely validated the Fed's view that the pressures would be temporary, as oil prices have receded from their highs.

The GDP report continued to show a buildup in inflationary pressures in the first quarter. The price index for personal consumption increased 2.4%, as previously estimated. That was double the rate of the fourth quarter.

The closely watched core PCE gauge, which excludes volatile food and energy prices, remained up 2.1%. That was up from the 1.3% rise in the fourth quarter.

Jobless Claims Increase

Initial jobless claims rose by 10,000 to seasonally adjusted 383,000 in the week ended May 26, the Labor Department said Thursday. It was the biggest jump in claims since the first week of April.

Economists surveyed by Dow Jones Newswires had forecast 370,000 new claims would be filed last week.

The four-week moving average of claims, which smooths out week-to-week volatility, increased by 3,750 last week to 374,500. Claims for the week ended May 19 were upwardly revised to 373,000 from the initially reported 370,000.

Labor officials said there was nothing unusual about the weekly data but numbers from five states were estimated due to the Memorial Day holiday.

Before this week, the pace of layoffs had leveled off during May after a spike in April. That gave hope that the economy would add more jobs in May after a lackluster reading the prior month. The government releases the latest payroll figures Friday.

In April, the economy added just 115,000 jobs, the second consecutive month job creation failed to top the 200,000.

The slowdown in hiring, coupled with worries about the ability of the U.S. and Europe to tackle fiscal challenges has caused increased concern among some economists in recent months.

The Federal Reserve, charged with maintaining price stability and achieving maximum employment, forecasts that unemployment will only edge down to between 7.8% and 8.0% by the end of this year. April's unemployment reading was 8.1% and economists expect it to remain unchanged in May.

If the labor market doesn't improve, the Fed could reconsider measures to stimulate the economy, such as another round of bond buying.

Thursday's report showed the number of continuing unemployment benefit claims—those drawn by workers for more than a week—decreased by 36,000 3,242,000 in the week ended May 19. Continuing claims are reported with a one-week lag.

The number of workers requesting unemployment insurance was equivalent to 2.6% of employed workers paying into the system in the week ended May 19, the same as the prior week.

Private Sector Adds 133,000 Jobs

Private-sector jobs in the U.S. increased 133,000 this month, according to a national employment report calculated by payroll processor Automatic Data Processing Inc. and consultancy Macroeconomic Advisers.

The gain was below economists' median expectation of 150,000 contained in a survey done by Dow Jones Newswires.

The April data were revised to show an advance of only 113,000 instead of the 119,000 increase reported earlier.

The ADP survey tallies only private-sector jobs, while the Bureau of Labor Statistics' nonfarm payroll data, to be released Friday, include government workers.

Growth in nonfarm payrolls has been anemic over the past two months. In April, only 115,000 jobs were created.

Economists surveyed by Dow Jones Newswires expect total nonfarm payrolls increased by 155,000 in May, and the jobless rate is projected to remain at 8.1%.

The weak ADP measure may cause economists to alter their payrolls forecast.

The latest ADP report showed large businesses with 500 employees or more added 9,000 employees in May, while medium-size businesses added 57,000 workers and small businesses that employ fewer than 50 workers hired 67,000 new workers.

Service-sector jobs increased by 132,000, and factory jobs fell by 2,000.

ADP, of Roseland, N.J., says it processes payments of one in six U.S. workers. Macroeconomic Advisers, based in St. Louis, is an economic-consulting firm.

On Wednesday, TrimTabs Investment Research said its calculation of May payrolls showed a "disappointing" gain of only 124,000.

Trimtabs uses daily tax deposits to calculate the monthly change in payrolls.

—Kathleen Madigan, Jeffrey Sparshott and Andrew Ackerman contributed to this article.

Write to Tom Barkley at tom.barkley@dowjones.com and Eric Morath at eric.morath@dowjones.com

Detroit's Wages Take on China's (US Becoming New Source of Cheap Labor!)

CANTON, Mich.—For the past four weeks, a team of 45 workers in gray smocks have been doing something here that hasn't been attempted on a large scale in America for at least four years.

They're making TVs.

The new assembly line is tucked inside a cavernous factory in this Detroit suburb that once made old-style tube televisions. Their first product: a 46-inch flat-screen model going on sale soon at Target stores for $499.

The project is the unusual result of a partnership between a U.S. branding company and a Chinese producer and is as much about marketing a U.S.-made television as it is about a global shift in manufacturing costs.

Making TVs in the U.S.A.

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Brian Widdis for The Wall Street Journal

Justin Parks worked at Element Electronics in Canton, Mich.

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"We think the economics favor this," says Michael O'Shaughnessy, chief executive of Element Electronics Corp., the Eden Prairie, Minn., company that has sold Chinese-made televisions in the U.S. under its Element brand name for six years.

To be sure, costs in China are going up as worker pay and other expenses, such as transportation, rise. Meanwhile, muted wage gains in the U.S. and fast productivity advances have reshaped many U.S. factories into tougher competitors. A recent survey of large U.S.-based producers by the Boston Consulting Group found more than a third plan to or actively considering bringing work home from China.

But Element's televisions also illustrate the limitations in restoring some types of production on U.S. soil. The only other domestically assembled televisions today come from a tiny California producer of waterproof models designed for use outdoors and there is virtually no domestic supply base for crucial parts, such as glass screens. The upshot: Virtually all the key parts needed to make a television today are imported.

Few industries have fallen as hard as television manufacturing. In the 1950s, there were some 150 domestic producers and with employment peaking at about 100,000 people in the 1960s. Then came the imports, first from Japan and later from other parts of Asia. TV manufacturing in the U.S. went all but extinct in the last decade. Syntax-Brillian Corp., a Tempe, Ariz.-based, company opened a production facility in Ontario, Calif., in 2006 to much fanfare—but that operation lasted only two years.

Flat screens tipped the scales even more in favor of the Far East, because as tube televisions grew bigger, the weight and size of the glass made shipping increasingly costly. That was the one thing that kept U.S. production going even in the face of imports. Flat screens, however, are a fraction of the weight and much more compact.

Element says the decision to produce in Detroit hinges on savings they gained by avoiding the roughly 5% duty on imported televisions and the reduced cost of shipping final products from the heartland of the U.S. to retailers. All the parts are initially being imported—which is one reason the products can only be marketed as "U.S. assembled."

Mr. O'Shaughnessy estimates the average savings on duties is about $27 for a 46-inch television—enough "to account for the increase in labor costs" in Detroit. The company declined to give more specifics, but noted that production methods in the U.S. are streamlined, involving component assemblies that in China might be separate steps on the production line.

The first televisions being made for Target have 52 pieces and require 24 production steps, including testing and final packaging.

Mickey Cho, chief operating officer of Tongfang-Global, the television-making arm of state-owned Tsinghua Tongfang Co., the Chinese partner, says Canton is only its first move toward what he calls global localization, making more products closer to where they are sold.

"Our Chinese suppliers want to invest domestically, too," he said. "They'll follow someone who shows them how to do it."

Shawn DuBravac, chief economist for trade group Consumer Electronics Association, says there are "definitely financial reasons" television companies are looking again at domestic production—though so far only Element has taken the plunge with a U.S. factory. "The labor cost differential isn't as great as it once was" compared with China, he says, and automation has reduced the amount of labor needed in to put together a television in any locale.

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More in the Series

Globalization Spurs Steel Mill

Jobs Trickle Back to U.S. Plants (5/22/2012)

A Crib for Baby: Made in China or Made in USA? (5/22/2012)

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The project does have skeptics. Paul Gagnon, director of North American TV research at NPD DisplaySearch, a Santa Clara, Calif.-based market research company, says the real competition for Element is factories just over the border in Mexico, not China. About half the televisions sold in the U.S. every year are made in Mexico, using parts imported from Asia—a model that avoids import tariffs and benefits from lower-cost Mexican labor.

"I just don't see any advantage to doing it here, other than for marketing purposes," says Mr. Gagnon.

Mr. O'Shaughnessy, however, insists there is reason to do it here. He notes that televisions made in Mexico, though benefiting from cheaper labor, end up costing more to ship to customers. The final cost of a set made in Mexico or Michigan "would be very similar," he says.

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Brian Widdis for The Wall Street Journal

An Element worker in Michigan inspected a flat-panel set last month.

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To be sure, being able to market a U.S. assembled product is part of Element's strategy which the company is convinced also carries value. The company's U.S.-made televisions are being sold in boxes emblazoned with a red-white-and-blue flag splashed across the side. Mr. O'Shaughnessy says he began by showing retailers a more subtle design, but they requested the big flag. The image of a television on the box, meanwhile, displays a picture of American workers on the line assembling televisions in Detroit. The company had to hire actors to stage the work when they were developing the packaging because production hadn't yet begun.

But even the boxes illustrate the difficulty of sourcing things domestically. The first wave of product is going out in boxes imported from China. Mr. O'Shaughnessy says he hopes to have a domestic supplier for those and the plastic pads and other packaging by the end of the year.

Scott Nygaard, Target Corp.'s TGT -0.58%vice president of electronics, said in a statement that he views the domestic origins of the televisions an "added bonus" to the product. QVC Inc., which also plans to market the Detroit-made sets, said the new factory shows how Element can "zig while others zag."

For now, the production is starting small, but could rise to 200,000 TVs a year if a second shift were added on the line. The factory, owned by Lotus International Co., a U.S. company that mostly does television repair on behalf of Element and other TV producers, has opened up floor space for up to five assembly lines.

Walking through the factory, Mr. O'Shaughnessy stops next to one of the flag-splashed boxes near the assembly line. "You get no points for subtlety in the TV market," he says

Flat U.S. Wages Help Fuel Rebound in Manufacturing

The celebrated revival of U.S. manufacturing employment has been accompanied by a less-lauded fact: Wages for many manufacturing workers aren't keeping up with inflation.

The wage lag is a key factor contributing to the rebounding competitiveness of U.S. industry. A recent uptick in factory employment and the return of some production to U.S. shores from abroad both added jobs that probably otherwise wouldn't exist. But sluggish wages also are squeezing workers' incomes and spending. That, in turn, hurts retailers who target middle-income earners and restrains the vigor of the economic recovery.

Overall compensation to factory workers doesn't come close to the impressive productivity gains that American factories have enjoyed over the past year. WSJ's David Wessel reports. (Photo: AP)

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"The U.S. has held manufacturing wages in check while there has been strong wage growth in China and moderate wage growth in Mexico," says economist Gordon Hanson of the University of California, San Diego, referring to two of the U.S.'s biggest lower-wage competitors.

With unemployment still high and global competition intense, employers have the upper hand in asking unions to relax work rules and restrain, or reduce, wages and benefits. Scores of U.S. companies have negotiated two-tier contracts with unions that allow them to pay new hires less than existing workers or otherwise restrain wage and benefit costs.

At American Axle & Manufacturing Holdings Inc.'s AXL -7.45%plant in Three Rivers, Mich., new hires for assembly start at $10 an hour. Those hired before 2008 get a "legacy" rate of about $18 an hour.

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More in the Series

A Crib for Baby: Made in China or Made in USA? (5/22/2012)

Once Made in China: Jobs Trickle Back to U.S. Plants (5/22/2012)

Indiana Steel Mill Revived With Lessons From Abroad (5/21/2012)

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General Electric Co. GE -1.60%announced plans to move production of electric water heaters to Louisville, Ky., from Mexico after U.S. unions agreed to a $13-an-hour starting wage for new hires, $8 to $10 or more an hour below the previous contract.

Without such concessions from workers, company executives say, they would be less likely to expand employment in the U.S. at all. After a 35% decline in the number of U.S. manufacturing jobs between 1998 and the trough in 2010, the total since has risen by 4.3% to 11.9 million in April.

Across the country, earnings for production and other nonsupervisory workers in manufacturing averaged $19.15 an hour in April, 3.2% below their recent March 2009 peak and back to where they were in 2000, adjusted for inflation, the Bureau of Labor Statistics says. In contrast, average hourly earnings for all private-sector production and nonsupervisory workers across the economy have risen 5.3% to $19.72 since 2000.

But averages can be misleading because there has been so much change in the industry, and wages measures don't count health or retirement benefits. The Employment Cost Index, a government measure that includes benefits and is adjusted for the changing mix of occupations and industries, shows that, adjusted for inflation, manufacturers' labor costs were 2.7% lower in the first quarter of 2012 than in 2005, when the economy was stronger and unemployment lower.

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For public and private civilian employers of all sorts, labor costs were basically flat—down 0.3%.

At the Vaughan-Bassett Furniture Co. plant in Galax, Va., where 635 workers make wooden bedroom furniture, workers went without any raise for two years. At the end of 2011 they got a 3% raise, on average. That isn't enough to keep up with the 7%-plus increase in consumer prices over those three years. Starting pay today for hourly workers in the nonunion plant is about $9 an hour, plus health insurance and other benefits. The most experienced typically get $14 to $15, plus benefits.

Good workers are easy to find in Galax, says Wyatt Bassett, the firm's chief executive. Five other furniture firms have closed plants there, leaving Vaughan-Bassett as the last local survivor. The firm is in the midst of an $8 million expansion that it expects will create more than 100 jobs. Modest wage growth and worker willingness to embrace more efficient production methods have allowed the company to compete with imports from Asia, Mr. Bassett says. The message from the workers, he adds, has been: "You all tell us what you need and we'll work with you."

The absence of wage growth may make manufacturers more likely to hire. But for workers, it means less income, and thus less to spend.

Harley Gannon, sole breadwinner for a family of five in Union City, Mich., got an assembly job 14 months ago at an International Automotive Components plant in Mendon, Mich., that pays $9.67 per hour, less than $21,000 per year. That is down sharply from the $15 per hour he earned repairing electronic games at a Chuck E. Cheese outlet before losing that job six years ago. "Our hourly wage structure is competitive in the industry," an IAC spokesman said.

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Mr. Gannon, 32 years old, who has a community college degree in electronics, hopes to be promoted to higher-paying maintenance work at IAC. For now, he is watching his pennies. Just filling the tank in his 1996 Ford Windstar eats up about a third of his take-home pay, he says. The family rents a three-bedroom home for $625 a month and relies on food stamps to stretch his paycheck. "My two older kids have just had birthdays, and I haven't been able to buy them presents yet," he says.

For some manufacturers, the key has been encouraging older workers to retire and hiring new ones at lower wages.

In 2010 and 2011, new hires by manufacturers of durable goods, those meant to last three years or more, were paid an average of 0.3% less than workers who were newly hired in 2007 and 2008, adjusted for inflation, according to an analysis of government data by Jesse Rothstein of the University of California, Berkeley. New hires in nondurable manufacturing were paid 1.7% less.

Despite their near-death experiences of recent years, the Big Three U.S. auto makers still pay some of the highest wages in manufacturing, but the average is declining. General Motors Co., GM -2.10%Ford Motor Co. F -1.66%and Chrysler Group LLC have a mix of veteran workers making around $29 to $33 an hour in base pay; recent hires earn $16 to $19, according to the Center for Automotive Research, an Ann Arbor, Mich., research group.

"Workers really understand the global economy," says Cindy Estrada, a 43-year-old vice president of the United Auto Workers. The rank and file know they need to be competitive on wages, she says. But some companies are pushing pay down so far—$10 or $11 an hour with monthly health care contributions of as much as $400 a month—that workers can't afford to buy the cars they build, she adds.

Of course in today's economy, many Americans are glad just to have a job. Joey Payton of Detroit says he earned $17.11 an hour at a Lear Corp. LEA -2.87%plant in Warren, Mich., assembling instrument panels for trucks, until he was laid off in late 2007. In July 2009, he got a job at Johnson Controls Inc. JCI -2.37%in Highland Park, Mich., where he assembles the same type of products—for $12.25 an hour. Mr. Payton, 31, has cut back on family trips and on buying electronic gadgets.

A spokeswoman for Johnson Controls says the company believes its "wages and benefits are competitive within the automotive industry."

The high school graduate says he is angry about having to work for less but says, "People will take anything just to get their bills paid and food on the table."

Amid complaints of "skill shortages" from U.S. manufacturers, workers with highly sought-after skills are doing better. Alle-Kiski Industries, a Leechburg, Pa., machine shop, cut wages for the operators of the computer-controlled machines that shape metal parts by about 5% in 2009 when orders slumped. Partly to keep those workers from leaving for other plants, the company since has increased pay about 20%, to an average of about $18 an hour, says Kevin Hartford, the company's president. Employment at the plant has risen to 37 from a low of 22 in 2009.

The sluggish wage growth coincides with an impressive burst of rising factory productivity. Output per hour in American manufacturing has increased by 13% in the past five years and 21% in the five years before that.

William Strauss, a Chicago Federal Reserve Bank economist, expects the pace of wage increases to quicken eventually if productivity gains persist. "Already, you hear about the dearth of certain kinds of workers," he says. "There's a recognition that as we train workers to be more productive and more skilled, you'd better compensate them so that they stay with you."

Indeed, Germany offers a relevant example. Inflation-adjusted wages there didn't rise much after the reunification of east and west in 1989 and declined in the mid-2000s. Holding the line on wage increases and altering union work rules made German factories more efficient and competitive—particularly in contrast to southern European factories—and contributed to the nation's export boom. But now German manufacturers are being pushed to increase wages.

Sometimes with conflict and strikes, sometimes without, many manufacturers have pressed unions to accept changes that reduce labor costs and improve efficiency. About 11% of U.S. manufacturing workers are represented by unions.

Spirit AeroSystems Holdings Inc., SPR -1.45%a Wichita, Kan., maker of aircraft parts, says many of its hourly workers earn roughly 5% to 10% above market levels so it is trying—gradually—to restrain base pay while giving workers upside based on quality and productivity. Over the past two years, Spirit has reached unusually long, 10-year pacts with its major unions that, the company says, will keep labor costs "stable and predictable."

Some unions are agreeing to the use of lower-paid temporary workers. Tony Wilson, president of the Machinists union local in Kansas City, Mo., estimates the temporary, or "casual," assembly workers at the Harley Davidson Inc. HOG -2.41%motorcycle plant there get about $14 an hour while union members get $22 an hour. "Obviously," he says, "the folks that are coming in as 'casuals' are victims of the economy."

A Harley spokeswoman said temporary workers who stay at the plant for more than nine weeks get raises to at least $16 an hour.

Angry Caterpillar Strikers Hunkering Down

By JAMES R. HAGERTY

JOLIET, Ill.—At a time when many Americans are willing to work on almost any terms, workers at a Caterpillar Inc. CAT -2.53%factory here are settling in for what could be a very long and costly strike. Their reasons include anger, a slim hope for a better deal and, for some, a feeling that they have enough skills to get jobs elsewhere if need be.

"To me, right now this is a pride thing," said David Downs, who has been at the plant for seven years. "On their part," he added. But members of the International Association of Machinists and Aerospace Workers, known as IAM, also have made resisting Caterpillar a matter of pride, voting overwhelmingly Wednesday morning to reject a slightly revised company offer and to continue their month-old strike. About 81% of the 620 people voting rejected the offer, down from 94% in a late April vote, just before the union went on strike.

About 770 workers are on strike, a union official estimated, adding that about a dozen have crossed the picket line. Caterpillar, the world's largest maker of construction and mining equipment, has cited a similar number of strikers.

Steve Jones, an IAM official, said the union stood ready to resume talks with Caterpillar. Caterpillar rebuffed the suggestion and said the union "has not offered any type of realistic proposal."

Caterpillar faced down strikes by the United Auto Workers in the 1990s and forced that union to make concessions, including sharply lower pay for newer workers. Earlier this year, Caterpillar closed a locomotive plant in London, Ontario, after workers refused to accept a pay cut of about 50%.

The Joliet strikers shrug off such history lessons. "Somebody's got to make a stand," said Brenda Baloy, who has worked there for 17 years. She and others are angry that Caterpillar is asking for concessions even as it projects record profit for 2012 and gave top executives big raises last year.

"We gave concessions when the company was struggling and now that they're doing well they want more concessions," said Terry Rieck, a 40-year veteran at the plant. "It's just time to share the wealth."

Some of the most skilled workers are confident they could get jobs elsewhere. Ryan Daggett, 37, whose father and grandfather worked at the plant, said he makes nearly $27 per hour operating complex machinery. A smaller shop probably would pay him $20, he said. Despite high unemployment, smaller manufacturers have had trouble finding enough experienced operators of some types of sophisticated equipment.

Some of the least experienced people are low-paid temporary workers with little job security and so they feel they don't have much to lose.

Caterpillar has gradually reduced its exposure to unions by opening plants in states with low union support and using more outside contractors. At the end of 2011, about 53% of Caterpillar's 27,000 production workers were covered by union contract agreements. Most of those union members belong to the UAW, which ratified a six-year contract in March 2011 after unusually smooth negotiations.

Caterpillar tweaked its offer to the Joliet workers last week, but the IAM strikers said the changes were minimal. For instance, the company offered a $1,000 bonus for each worker if the union ratified the agreement promptly. That was up from zero in recent weeks but down from the $5,000 signing bonus offered in April. The six-year contract would allow Caterpillar to freeze wages for workers hired before May 2005. For those hired since then, the company could adjust wages based on its assessment of the labor market. Workers would pay more for health insurance, and Caterpillar would have more flexibility to require workers to change shifts.

Workers in the plant, which makes hydraulic pumps for Caterpillar machinery, generally earn around $13 to $28 per hour.

Caterpillar has continued to operate the plant by using white-collar employees. Workers have erected a giant inflatable rat outside the plant gates. One held aloft a sign reading "IAM Stands, Scabs Kneel."

"They're making a hard-line stand," Mr. Rieck, the veteran worker, said of Caterpillar. Which side is more stubborn? "We'll find out," he said.