U.S. Corporations Making Record Profits – Plan to Cut Employment and Investment

Is That Why They Need a Tax Cut?

In the Conservative world (as opposed to the real world) all problems of the economy can be solved by tax cuts.  See tax cuts for corporations would provide them with additional funds and additional profits and additional reasons to invest and hire.  Looking at current data, it doesn’t work out quite that way.

Corporate Profits in the 3^rd quarter, just ended on September 30 were very high, for many companies as high as they have ever been.

Among the 135 companies in the Standard & Poor's 500-stock index that have reported their third-quarter earnings, 69% have exceeded analyst expectations, according to Thomson Reuters. Profits have been up an average of 14.7% from a year earlier, and revenue is up 9.8%, led by the strong gains of energy and materials companies.

So according to Conservative doctrine this should be great news.  Companies with high profits and high cash balances should be ready to start the economy rolling again.  Except they are not.

In a sign that executives see a rockier road ahead, many manufacturers are setting aside money to fund moves aimed at cutting costs and streamlining operations. Those steps could include job cuts and factory closures, as businesses seek to pare expenses ahead of what is widely expected to be slow revenue growth in 2012.

See this is what basic Keynesian economics says will happen.  Demand for goods and services is the key to economic growth.  Because business is looking at weak demand for 2012, they are reacting accordingly, despite their current profitability.

"We all read the headlines," Danaher Chief Executive Larry Culp said last week. Given the uncertainties around 2012, it is "better to be prepared and ready for what may come than to postpone what we think is a very prudent action," Mr. Culp said on a conference call with analysts

And of course the fear for the future builds on itself, creating even more fear for the future.

But the fear is that precautionary restructuring moves could cause more companies to follow suit. "In many ways, this is part of the negative feedback loop," said Deane Dray, an analyst at Citigroup Global Markets. "Once you start head-count reductions and plant closures, you are adding to the unemployment, you are adding to the anxiety in the market."

Conservatives want to cut corporate income taxes, which will increase corporate after tax profits.  But increasing corporate after tax profits does not spur hiring and investment, as everyone except them can now see.  Maybe they only read the Wall Street Journal for the editorial section, where there is vast agreement with their positions regardless of the facts on the ground.