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More To Do: Companies need ways to make money beyond job cuts and savings, analysts say
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Gary Lewis (left) and Vince Lanfranca install components on the underside of a 2010 Ford Escape at a plant in Claycomo, Mo.
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Published: September 3, 2009
WASHINGTON - Companies managed to increase their workers' productivity and their own profits in the spring mainly by slashing costs and capping their employees' pay.
That was clear from revised government figures released yesterday that provided further evidence that a tentative economic recovery has begun, while also reinforcing nagging concerns. Analysts worry that the tight job market and lack of wage growth will depress incomes, limit further corporate profitability, and forestall a pickup in all-important consumer spending.
Bill Schultz, the chief investment officer at McQueen, Ball & Associates in Bethlehem, Pa., said that companies that have shed workers and squeezed out savings won't be able to show the profit gains they did last quarter by relying on more big cuts. Having already made deep reductions, companies will need to find ways to generate more revenue.
"Profits have recovered nicely, but it's more the way that they have recovered that gives people pause," Schultz said. "The key is to somehow blend this cost-cutting with revenue growth."
Productivity -- the amount of output per hour of work -- rose at an annual rate of 6.6 percent in the April-June quarter, the Labor Department said. That is the largest advance since the summer of 2003. And it's slightly better than the 6.4 percent productivity increase that the government had estimated last month.
At the same time, labor costs fell at an annual rate of 5.9 percent -- the sharpest drop since 2000 and slightly more than the 5.8 percent drop estimated a month ago.
Economists said that the rising productivity and lower labor costs supported their view that the longest recession since World War II is coming to an end.
Mark Zandi, the chief economist at Moody's Economy.com, said that it is "very typical" for productivity to surge at the end of a recession as businesses aggressively cut costs.
Economists say they don't expect productivity to keep surging. But they said that the productivity jump in the second quarter, combined with falling labor costs, might persuade employers to slow their pace of layoffs and eventually resume hiring.
That is critical because until the labor market heals, consumers probably won't step up their spending. And consumer spending, which accounts for about 70 percent of economic activity, is a vital ingredient in any sustained rebound from the recession. A dismal job market makes that prospect uncertain.
On Friday, the government will report the unemployment rate for August. Economists expect the rate to tick up to 9.5 percent, from 9.4 percent in July, and that a net total of 225,000 jobs were lost in August, down from 247,000 jobs lost in July.
The jobless rate is widely expected to top 10 percent by next spring, before a recovery is strong and sustained enough to push that rate down. During this period, the economy also faces the risk that a recovery would falter and the economy would fall back into recession.
"This is always a tricky transition, and there are many things that could still derail the economy, given that the labor market is still very weak," Zandi said.
William Rutherford, the president of Rutherford Investment Management LLC in Portland, Ore., agreed that companies don't have much leeway to cut costs without hurting vital parts of their businesses. Sustained profitability will require higher revenue, he said.
"They've done a lot of cutting of jobs," Rutherford said. "They've gotten their inventories down under control. I think from here on out, we're going to have to see some top-line growth."
With the recession showing signs of ending, Federal Reserve policymakers last month felt comfortable slowing the pace of its program to buy Treasury securities and putting off any major changes to other programs, according to minutes of their discussions released yesterday.
But a "poor" jobs market, evaporated wealth, hard-to-get credit and stagnant wages mean that consumers are still facing "considerable headwinds," the minutes said.
"With these forces restraining spending, and with labor income likely to remain soft, (Fed) participants generally expected no more than moderate growth in consumer spending going forward," the minutes said.
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