US companies churn out profits but not jobs

NEW YORK, (Reuters): The sluggish pace of hiring may be hobbling the U.S. economy, but it’s not been holding back big U.S. companies’ profits thanks to growth overseas and cost controls at home. And that’s bad news for the more than 14 million Americans without jobs.

 Big businesses would normally be desperate for surging job growth as it would feed into domestic demand but these aren’t normal times. Massive growth opportunities overseas, especially in China and other buoyant Asian economies, have some of the largest American companies on track for record profits, even if they’re businesses are mostly treading water in the U.S.

 The message last week from the chief financial officer of one of the nation’s industrial giants couldn’t be clearer.

 “We’ve driven all this cost out. Sales have come back, but people have not,” said Greg Hayes, chief financial officer at United Technologies Corp. “It’s the structural cost reductions that we have done over the past few years that have allowed us to see strong bottom-line results.” The company, the world’s largest maker of air conditioners and elevators, said second-quarter profit rose 19 percent, and it is doing most of its hiring in emerging markets where demand for its products is growing fastest.

 It isn’t alone in seeing profits climb in the current earnings reporting season.

 About 78 percent of companies in the benchmark S&P 500 index that have reported second-quarter earnings have beaten Wall Street expectations. Many benefited after slashing costs when the financial crisis hit and then keeping tight control on them even as sales recovered.

 Economists say the ability to do more with less has helped create a two-speed U.S. recovery. The S&P 500 has doubled in value since the recession ended and per-share earnings are currently on track for a new annual record, while employment remains below the level seen in late 2008 when corporate profits troughed.

 Employers added fewer jobs in June than at any time in the past nine months, and the jobless rate rose to 9.2 percent - higher than when the recession ended in early 2009.

 “We’ve never seen the kind of shedding of jobs that we saw in this recession. America’s corporations have never been running so efficiently,” said Ellen Zentner, senior U.S. economist at Nomura Securities in New York.

 LITTLE WAGE GROWTH

 What’s more, workers have never claimed such a paltry share of real national income growth. Economists at Northeastern University in Boston recently found corporate profits captured 88 percent of income growth between the second quarter of 2009 and the fourth quarter of 2010.

 Workers’ take? Slightly more than 1 percent.

 “The only major beneficiaries of the recovery have been corporate profits and the stock market and its shareholders,” the study concludes.

 The high jobless rate is also keeping wage growth severely restrained in the U.S., which is also good for profit margins.

 Recent Department of Labor data showed unit labor costs edged up 0.7 percent in the year to March, though not enough to make up a 2.9 percent decline in the prior 12-month period.

 Northeastern economics professor Andrew Sum called the mismatch “historically unprecedented” and said it bodes ill for future growth, especially given many companies are sitting on their cash rather than investing it.

 “Workers have no money, no purchasing power, so that’s why consumption is not moving,” he said. By sitting on profits, firms are acting like earners “who take their money and stuff it in the mattress. That’s happening across the economy.” U.S. economic growth slowed sharply in the first quarter and was expected to remain below 2 percent in the May-June period.

 Some blamed that on high energy prices and supply shortages caused by Japan’s earthquake and are betting on a rebound in the second half.

 A July Reuters poll put the median estimate for 2011 growth at 2.7 percent, down from 2.9 percent in 2010.

 CHICKEN AND EGG

 Businesses’ ability to do more with the same or less -- what economists term increased productivity  -- has been rising since the 1990s, thanks partly to technological advancements and the ability to tap markets in fast-growing, lower-cost developing countries.

 Some of the most profitable firms are those with overseas markets. The largest U.S. conglomerate General Electric Co. tied its 21.6 percent rise in earnings partly to strong foreign demand for its heavy equipment, including jet engines and electric turbines.

 In the United States, things are obviously different.



Consumers are still trying to pay down large debts built up during the boom years, which suppresses spending and means there is little incentive for companies to hire.

 “It’s a chicken-and-egg thing -- whether demand or supply drives growth,” Zentner said. “Studies show that lack of sales for small business is the biggest impediment to hiring.”