Monday, July 26, 2010

Companies Unsure about Economy NOT the reason for lack of Hiring and Expansion. New Slimmer Business Model.

Top down, voodoo economics has fazed out large workforces for leaner production and higher shareholder profits. Republicans may continue to say the business community is unsure about regulation and health care costs, but the truth is, a new business model has emerged. They've found a way to keep Americans unemployed and still make money. NY Times:

Harley-Davidson … 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 … 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 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.


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 ... 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. 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 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.

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 ... 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.

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