Asset-driven recovery still needs work
A lot of companies are reporting good profits, but many people are unsure if things have really turned around. What gives? Commentator Robert Reich says it's not that hard to figure out.
Robert Reich (Robert Reich)
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TEXT OF COMMENTARY
Kai Ryssdal: Yes, the recession is technically over. And yes, a lot of companies are reporting pretty good profits. But I bet if you stopped 10 people randomly on the street this afternoon, most of 'em would say they are still very much undecided about whether things have really turned around. What gives?
Commentator Robert Reich says it's not all that hard to figure out.
ROBERT REICH: How can the stock market hit new highs when unemployment continues to hit new highs? Simple. Corporate earnings are up because companies are cutting costs. And the biggest single cost is their payrolls. So they let people go and, presto, balance sheets look much better, and stock prices rise.
In the old-fashioned kind of recession decades ago, big companies laid off people with the expectation of rehiring them when the economy turned up. Then a few recessions back, companies started laying off people for good, never rehiring them even when the economy recovered.
In the Great Recession of 2008-2009, companies are going a step further. They're using the sharp downturn to cut payrolls even below where they were when times were good. Outsourcing abroad, contracting out, replacing people with software and automated machines, whatever it takes to get payrolls down so earnings bounce up.
Caterpillar earned $404 million in the third quarter, or 64 cents a share. Analysts had expected only 5 cents. How did Caterpillar do it? Not by selling more bulldozers. But by cutting over 37,000 jobs.
We're having an asset-based recovery, not a Main Street recovery. The surge in productivity is a mirage. Worker output per hour is skyrocketing because, hey, companies are getting almost as much output with fewer workers and fewer hours.
The Fed, meanwhile, is collaborating in all this, making it as cheap as possible for companies to axe their employees. Money costs so little these days it's easy to substitute capital for labor, and burnish balance sheets.
The Fed, in effect, is placing a huge bet on a recovery driven by asset prices. That's a bad bet. The great disconnect between the stock market and jobs is pushing stock prices way out of line with the real economy. That's not sustainable. No economy can recover without consumers. But consumers -- facing mounting job losses as well as pay cuts -- are in no mood to buy and won't be for some time.
Now, I'm not predicting a major correction or double dip any time soon, but watch your wallets.
Ryssdal: Robert Reich teaches public policy at the University of California, Berkeley.
Comments
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From Davidson, NC, 11/24/2009
Smoke and Mirrors. When will these CEOs learn?
From MA, 11/20/2009
Ed Mazria's architecture2030.org's concept of one-year 4 million job inititave. It sounds like a great idea to me! He details it on the website: www.architecture2030.org
From Atlanta, GA, 11/19/2009
I'm usually critical of Mr. Reich's poisitions, but this time he has made some good points. The step I'd like to see him take is tell me what to do. It appears companies are meeting current demand with fewer workers. Now what?
11/19/2009
Mr. Reich: you describe an "asset-based recovery" where "companies are getting almost as much output with fewer workers and fewer hours". This implies that the companies never needed those workers in the first place.
Does that imply a labor bubble? That is, were many more people employed "unnecessarily," i.e. in a capacity that didn't add to companies' profits? It sounds like it to me.
I'm not arguing a point either way, but your commentary opens the door to this question but doesn't address this dynamic.
I understand that R&D and other forward-looking business development is tied to investment in labor without near-term returns. Some companies have cut this out of their payroll and will feel the negative effect on their future revenue. I'd bet, however, that this doesn't explain most of the 10.2% unemployed in the US right now. So what's to justify how companies can hire the rest of the unemployed without negatively affecting profitability?
Unfortunately, I don't think that hiring for the sake of creating consumers is a true justification -- that only serves to create a circular relationship from producer to employee to consumer back to producer that would serve to re-inflate a bubble.
From HI, 11/19/2009
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Now, I'm not predicting a major correction or double dip any time soon, but
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Although you are innocent of a self-fulfilling prediction, you have given us a hint, a hint of unaccounted for deflation still looming further up the pipe for the Indian Nation .
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Just turn off the laser or aim it away from my crotch -- I am ready to talk now.
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It is not time to talk Mr. Bond. It is time to die Mr. Bond. It is dying time for die-hard common-stock holders unless then sell stock and buy T-Bonds, Mr. T. Bone Bond.
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Arrgggh
!
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From Dallas, TX, 11/19/2009
I was interested in the "asset recovery" angle that many companies seem to be relying on to make them appear profitable. I don't understand why supposedly intelligent people - who run the companies are banking on asset recovery to boost their stocks - don't seem to understand that every person they lay off will mean there is one less person to purchase the products these companies are needing to sell. Cutting the payroll may be a quick fix - but if consumers aren't able to purchase product the company will be most likely be going to go out of business at some point. Why not find away to keep people employeed so there will be consumers to purchase the products these businesses are selling?
From seattle, WA, 11/18/2009
Which comes first, the chicken or the egg? Does a company need to feel confident in their profits in order to hire? Does a consumer need to feel confident in a company to buy their product? Certainly I don't want to buy a car or computer from a company that will go under next week...
Inflation will certainly punish those conservative savers... Both of them. We are a debtor nation and I can see why Bernake is trying to inflate Money Supply. It is better for the greater amount of people to devalue our debt. Certainly it is not prudent, nor fair to the world that we owe. However, we must remember we are also experiencing a huge amount of credit deflation offsetting much of the inflationary measures. It is a delicate balance and it amazes me that one man is put in charge of it... Especially as he is one of the ones that got us in this mess!
From Sacramento, CA, 11/18/2009
Using this logic the companies were employing people that they would not have been if interest rates were low, or lower.
But, in truth, companies have always "replaced" labor by outsourcing and buying better assets. Nothing new here.
The stock market, in the short run, is a voting machine, albeit not so democratic. But the people with enough money left over to even invest are desperate to recoup gains and will look at any news to vote that stock market up. Is that sustainable, probably not. But, its not the feds fault.
From Perryopolis, PA, 11/18/2009
Ben Bumnancke is Public Enemy No 1. He gives interest only loans at zero percent to his banker friends while simultaneously looting the balances of conservative savers. He is a far bigger crook than Madoff could ever aspire to. The Fed has given the green light to a giant pool on Wall Street and has told Goldman Sachs, Morgan Stanley, et.al. to run up stock prices and assured them that when the time is right the Fed will forward the inside information required sell at the top and rob the little guy on the way down. Don't forget, Ben Bumnancke is George Bush's buddy too. And a crook through and through.
From Milan, MI, 11/18/2009
Sure, no recovery can last without consumer spending. But a recovery driven by spending beyond our means--which is what any "stimulus" is at its root--is necessarily equally unsustainable. The only way to get the economy back on its feet is to start producing value again, which requires both capital and labor.
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