What Recession? – Corporate Profits Have Had Big Growth

So Why Aren’t They Hiring – Mr. Keynes Knows (And He Has Been Dead for over 50 Years)

Why is corporate America so glum?  It’s not because profits haven’t risen. 

Corporate profits rose an estimated 3% in the second quarter from the first, better than the 1% improvement in the first three months of the year, the Commerce Department said Friday. Profits were up more than 8% from last year's second quarter. The domestic nonfinancial sector drove most of the growth, as financial profits declined.

So what is the problem?

The problem is the way in which corporate profits have risen.  Once the recession hit business found itself under heavy pressure to cut costs, which it did.  Primarily it cut costs by reduced labor costs, eliminating millions of jobs.  This process is not unusual, in good times businesses are lax about controls, and it takes a downturn to create pressure to improve productivity and reduce costs.

The problem is that in increasing productivity and profits by reducing costs, particularly labor costs, companies have sowed the seeds of future problems because the cost cutting thing is a one time event.  And once a company has gone through that process its profits can only increase with increased sales and revenues.

Among the potential land mines ahead: slowing global growth, a worrisome fiscal picture as Washington battles over the debt and plunging sentiment among U.S. consumers and businesses, raising risks of a pullback in spending.

See in the aggregate this "cost cutting/reduced employment" process is self defeating.  Loss of jobs means loss of income which means lower spending which means lower demand for the goods and services that corporations make.  So while the recent past has been good for profits, the future depends upon economic growth, which is not forthcoming.

"The biggest problem is that their order books are thin," said Macroeconomic Advisers chairman Joel Prakken. "They need fat order books to add people. They need fat order books to buy machines."

If consumers are not spending, government must spend to stimulate the economy.  Mr. Keynes explained all of this over 70 years ago.  But that’s not going to happen, is it. 

 

Mr. Obama will unveil a “jobs program” soon. It may contain a useless reduction in the payroll tax paid by employers and a "jobs tax credit to encourage them to hire workers they don’t need and won’t hire because they don’t need them, regardless of how low the employer share of the payroll tax is or what kind of tax credit they get. 

 But unless the jobs program includes a large increase in targeted federal spending, it will be largely ineffective.  And if it does include a large increase in targeted federal spending it will be impossible to enact into law.

This is why The Dismal Political Economist is called “Dismal” for short by his friends.