So, not being an economist and all, I wonder if this is the sort of thing that would be part of a cycle leading to deflation? Doesn't it sync with Lou's other recent post of an article on the potential for deflation?
On Mon, Jul 26, 2010 at 7:01 AM, Louis Proyect <[email protected]> wrote: > NY Times July 25, 2010 > Industries Find Surging Profits in Deeper Cuts > By NELSON D. SCHWARTZ > > By most measures, Harley-Davidson has been having a rough ride. > > Motorcycle sales are falling in 2010, as they have for each of the last > three years. The company does not expect a turnaround anytime soon. > > But despite that drought, Harley’s profits are rising — soaring, in > fact. Last week, Harley reported a $71 million profit in the second > quarter, more than triple what it earned a year ago. > > This seeming contradiction — falling sales and rising profits — is one > reason the mood on Wall Street is so much more buoyant than in > households, where pessimism runs deep and joblessness shows few signs of > easing. > > Many companies are focusing on cost-cutting to keep profits growing, but > the benefits are mostly going to shareholders instead of the broader > economy, as management conserves cash rather than bolstering hiring and > production. Harley, for example, has announced plans to cut 1,400 to > 1,600 more jobs by the end of next year. That is on top of 2,000 job > cuts last year — more than a fifth of its work force. > > As companies this month report earnings for the second quarter, news of > healthy profits has helped the stock market — the Standard & Poor’s > 500-stock index is up 7 percent for July — but the source of those gains > raises deep questions about the sustainability of the growth, as well as > the fate of more than 14 million unemployed workers hoping to rejoin the > work force as the economy recovers. > > “Because of high unemployment, management is using its leverage to get > more hours out of workers,” said Robert C. Pozen, a senior lecturer at > Harvard Business School and the former president of Fidelity > Investments. “What’s worrisome is that American business has gotten used > to being a lot leaner, and it could take a while before they start > hiring again.” > > And some of those businesses, including Harley-Davidson, are preparing > for a future where they can prosper even if sales do not recover. > Harley’s goal is to permanently be in a position to generate strong > profits on a lower revenue base. > > In some ways, the ability to raise profits in the face of declining > sales is a triumph of productivity that makes the United States more > globally competitive. The problem is that companies are not investing > those earnings, instead letting cash pile up to levels not reached in > nearly half a century. > > “As long as corporations are reinvesting, the economy can grow,” said > Ethan Harris, chief economist at Bank of America Merrill Lynch. “But if > they’re taking those profits and saving them, rather than buying new > equipment, it hurts overall growth. The longer this goes on, the more > you worry about income being diverted to a sector that’s not spending.” > > “There’s no question that there is an income shift going on in the > economy,” Mr. Harris added. “Companies are squeezing their labor costs > to build profits.” > > The trend is hardly limited to Harley. Giants like General Electric and > JPMorgan Chase, as well as smaller companies like Hasbro, the toymaker, > all improved their bottom lines despite slowing sales in the second > quarter. Among the S.& P. 500 companies that have reported > second-quarter results, more than one in 10 had higher profits on lower > sales, nearly twice the number in a typical quarter before the > recession, according to Thomson Reuters. > > “Whole industries are operating at new levels of profitability,” said > David J. Kostin, chief United States equity strategist at Goldman Sachs. > “In the downturn, companies managed to maintain higher profit margins > than ever before.” > > Profit margins — the percentage of revenue left over after expenses — > crumble in most recessions, as overall sales fall but fixed costs like > infrastructure, commodities and rent remain the same. In 2002, during > the recession that followed the bursting of the technology bubble in > addition to the Sept. 11 attacks, margins sank to 4.7 percent. Although > the most recent downturn was far more severe, profit margins bottomed > out at 5.9 percent in 2009 and quickly rebounded. By next year, analysts > expect margins to hit 8.9 percent, a record high. > > The difference this time is that companies wrung more savings out of > their work forces, said Neal Soss, chief economist for Credit Suisse in > New York. In fact, while wages and salaries have barely budged from > recession lows, profits have staged a vigorous recovery, jumping 40 > percent between late 2008 and the first quarter of 2010. > > Harley-Davidson’s profit gain last quarter was helped by a turnaround in > its financing unit, as well as more efficient production, but the > company is still cutting. > > Harley has warned union employees at its Milwaukee factory that it would > move production elsewhere in the United States if they did not agree to > more flexible work rules and tens of millions in cost-saving measures. > > Even if sales do improve, a surge in hiring is unlikely. > > “The last thing we’re worried about is when are we going to have to add > more capacity, because what we’re really doing is reconfiguring our > entire operational system for greater flexibility,” Keith Wandell, the > company’s chief executive, said on a conference call with analysts last > week. > > Harley’s evolution is part of longer-term shift in American > manufacturing, said Rod Lache, an analyst with Deutsche Bank. > > At Ford, revenue in its North American operations is down by $20 billion > since 2005, but instead of a loss like it had that year, the unit is > expected to earn more than $5 billion in 2010. In large part, that is > because Ford has shrunk its North American work force by nearly 50 > percent over the last five years. > > “These companies have cracked the code of a successful industrial > turnaround,” Mr. Lache said. “They’re shrinking the business to a size > that’s defendable, and growing off that lower base.” > > To be sure, sales are rising for many companies, albeit at a much slower > pace than the increase in profits. Among the 175 companies in the S.& P. > 500 that have reported earnings for the second quarter, revenues rose > 6.9 percent on average while profits jumped 42.3 percent, according to > Thomson Reuters. > > Still, even at corporations where both the top and bottom lines are > expanding, the focus remains on keeping profits high, not rebuilding > work forces decimated by the recession. > > When Alcoa reported a turnaround this month in profits and a 22 percent > jump in revenue, its chief financial officer, Charles D. McLane Jr., > assured investors that it was not eager to recall the 37,000 workers let > go since late 2008. “We have a tight focus on spending as market > activity increases, operating more effectively and minimizing rehires > where possible,” he said. “We’re not only holding headcount levels, but > are also driving restructuring this quarter that will result in further > reductions.” > > Michael E. Belwood, a spokesman for Alcoa, said more than 17,500 of the > former workers were employed at units Alcoa has since sold, but added > that the company “had to be resized to match the realities of the > recession.” > > “We’re keeping a close eye on costs because there is still uncertainty > about the stability of this recovery,” he said. > _______________________________________________ > pen-l mailing list > [email protected] > https://lists.csuchico.edu/mailman/listinfo/pen-l >
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