Companies Wringing Huge Profits From Job Cuts - NYTimes.com

I originally posted this article on Twitter this AM but I have been talking about it so much with clients that I thought I would show it on my blog as well.

One of the puzzles for many investors is how the stock market seems to be doing just fine in the face of fairly dismal economic statistics.

For example, the S&P 500 is up over +8% this month alone. At the same time, home sales have nose-dived, unemployment remains very high, and consumer confidence is subdued at best.

However, company profits are actually coming in pretty good for the second quarter. How is this? Here's an excerpt from the article:

Many companies are focusing on cost-cutting to keep profits growing, but the benefits are mostly going to shareholders instead of the broader economy, as management conserves cash rather than bolstering hiring and production...

...As companies this month report earnings for the second quarter, news of healthy profits has helped the stock market — the Standard & Poor’s 500-stock index is up 7 percent for July — but the source of those gains raises deep questions about the sustainability of the growth, as well as the fate of more than 14 million unemployed workers hoping to rejoin the work force as the economy recovers.

And then later in the same article:

In 2002, during the recession that followed the bursting of the technology bubble in addition to the Sept. 11 attacks, margins sank to 4.7 percent. Although the most recent downturn was far more severe, profit margins bottomed out at 5.9 percent in 2009 and quickly rebounded. By next year, analysts expect margins to hit 8.9 percent, a record high.

The difference this time is that companies wrung more savings out of their work forces, said Neal Soss, chief economist for Credit Suisse in New York. In fact, while wages and salaries have barely budged from recession lows, profits have staged a vigorous recovery, jumping 40 percent between late 2008 and the first quarter of 2010.

And then you can add a further gloomy note. The jobs that are being created - and there are a few out there - require a skill set that many workers don't seem to have. Here was an opinion piece by Matt Miller in last week's Washington Post:

Broadly speaking, there are two big things we need to do. The first, put well (if not in a sexy slogan) by economist Michael Spence in the Financial Times recently, is "to create capital-intensive jobs that have labor productivity levels consistent with advanced country incomes."

The second big thing is to make sure Americans have the skills to perform these jobs.

How are we doing on this agenda? Dismally. For starters, U.S. elites simply don't think in terms of a national economic strategy of the kind Spence states so simply. To be sure, the stimulus funded some energy technologies with real promise -- advanced storage and lighting technologies, and power conversion devices, for example -- that are poised to lift productivity in these areas dramatically. Such productivity gains can make higher wages sustainable. But we're not yet close to the needed scale of public- and private-sector effort here.

Companies Wringing Huge Profits From Job Cuts - NYTimes.com

http://www.washingtonpost.com/wp-dyn/content/article/2010/07/21/AR2010072103052.html