Corporate downsizing increased year over year in 2005 for the first time since 2001, according to a report by outplacement consultancy Challenger Gray & Christmas Inc. Job cuts increased each quarter in 2005 and totaled 1.07 million for the year, up 3.1% from nearly 1.04 million announced in 2004. The nation created more jobs than it lost in 2005, however, with net job growth of about 1.8 million through the end of November, according to Challenger Gray & Christmas.

A plodding recovery in the nation’s office markets reflects the measured pace of job growth. After four years of economic expansion, office vacancy nationwide remained elevated at 14.5% at the close of 2005, according to Grubb & Ellis. By contrast, the vacancy rate in the industrial market — which follows shipping and production volume more than it does employee headcounts — was a tight 7.9% at the end of 2005, down from 9.4% a year earlier.

Moderate employment gains are preferable to the kind of overly ambitious growth of the dot-com boom, says Jim Costello, senior economist at Boston-based Torto Wheaton Research. “Job growth is not as fast as it was in the past but it’s still positive. This growth, at least, is real because corporate profits are driving it.”

The pace of job cuts generally increases along with hiring in periods of economic growth as companies improve efficiency and focus on core strengths, Costello says. An employer may outsource or eliminate non-essential functions, but the end result is often greater productivity, profit and new hires to support core operations. “It’s a process of creative destruction.”

Nearly a quarter of job cuts in 2005 were in the automotive and government/non-profit sectors, Challenger Gray & Christmas found. Government and non-profit cuts increased by 48% to 136,640 from 92,094 in 2004; automotive employers made 110,016 cuts last year, up 43% from the previous year’s 77,174.

The biggest problem for employers in the coming years will be paying for rising legacy costs, according to John Challenger, CEO of Challenger Gray & Christmas. “Overburdened, under-funded and mismanaged pension plans will have a significant impact on earnings and force employers to cut costs,” Challenger states in the report on downsizing. “Some will even be pushed into bankruptcy.”