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Signs of Erratic Recovery

Bill Alexander, who runs a medium-sized component supply company in San Jose, has just opened a new product line and expanded into an extra 7,000 square feet of space. "For the last couple of months, it's all we can do to keep on top of business," says Alexander, CEO of California Equipment Services. "I sense the economy is not as bad as we think it is."

But Tom Livingston, owner of the Press, a printing company in downtown San Jose, tells a different story. Normally, his business picks up as tech companies order more brochures, technical data sheets and printed marketing materials. "I haven't seen it yet," he says...

Hopes are rising for a rebound in personal computer sales after Intel increased its estimate for its third-quarter sales because of "strong, broad-based" demand for microprocessors and computer equipment.

Stock analysts raised their estimates for a number of tech companies last week, including Siebel Systems and Oracle. Cisco Systems CEO John Chambers also said that August sales were better than he had expected.

What's missing in Silicon Valley, as throughout the country, is job growth. Friday, the Labor Department reported a surprising drop in the number of jobs in August, prompting Federal Reserve Governor Ben S. Bernanke to call it not so much a "jobless recovery" as a "job-loss recovery."

Job growth lagging...

Jim Cunneen, president of the San Jose Silicon Valley Chamber of Commerce, is hearing similar stories. Some companies are still laying off workers, while elsewhere, signs of improvement are developing. "It's a mixed optimism," Cunneen says. "We won't have a meaningful recovery until jobs are added."

Local car dealers give a similar mixed report. Sales of new vehicles in the county will probably not drop as sharply as expected this year and then should rise by about 8 percent next year, said Stephen C. Smith, executive director of the Silicon Valley Auto Dealers Association.

"People are starting to see the light at the end of the tunnel," says Mark Normandin, general manager of Normandin Chrysler-Jeep in San Jose.

The reason for the paradoxical economy isn't hard to find. Productivity is rising sharply, allowing companies to produce more with fewer workers, while the glut of capacity left over from the tech bubble still persists.

On a national level, most of the economic push is coming from the federal government: low interest rates from the Federal Reserve, the highest rate of government spending since the 1970s and lowered federal taxes. "This is a stimulus-based recovery, not a demand-based, job-creating recovery," says John Mauldin, president of Millennium Wave Investments in Austin.

Another reason is that manufacturers are moving production to low-cost, low-wage countries such as China and Thailand and white-collar office jobs to countries such as India.

"This structural change has been going on since the late 1980s, and it has now accelerated during the recession and recovery," says Lakshman Achuthan, managing director at the Economic Cycle Research Institute.

ECRI's economic indicators show the split personality of the emerging economy: Its leading index of economic growth has hit a 20-year high while its leading index of job growth remains sluggish. This means the gross domestic product may grow as fast as 4 percent to 5 percent by the end of this year, but employment will still lag, Achuthan says.