Government statistics through the first quarter of 2010 show that corporate profits recovered 87 percent of what they lost in the recession.
This rebound in profits frees companies to be more aggressive. Standard & Poor's 500 index companies, like Apple, Boeing and Caterpillar, are sitting on huge cash reserves; a record of $838 billion as of the end of March, up 26 percent from a year earlier. "They have the wherewithal to do whatever they want -- hire; make new investments; raise dividends; do mergers and acquisitions," says S&P's Howard Silverblatt. Historically, higher profits lead to higher employment, says Mark Zandi of Moody's Economy.com.
From late 2007 to late 2009, payroll employment dropped nearly 8.4 million. Since then, the economy has recovered a scant 11 percent of those lost jobs. Companies are doing much better than workers; that defines today's economy.
The most obvious explanation is that the relationship between labor and capital (to borrow Marxist vocabulary) has changed. Capital has gotten stronger; labor has weakened. Economist Robert J. Gordon of Northwestern University argues that the "shift of executive compensation towards much greater use of stock options" has made corporate managers more zealous cost-cutters in recessions and more reluctant hirers early in recoveries. Lowering the headcount is the quickest way to restore profits and, from there, a company's stock price.
Jobless recoveries have become standard. After the 1990-91 recession, consistent employment growth did not resume for about a year; the lag was nearly two years after the 2001 recession.
In hindsight, the massive job cuts of 2008 and 2009 should not have been surprising. "With the collapse of the financial system," says economist Lynn Reaser of Point Loma Nazarene University in San Diego, "companies had to conserve cash desperately, (because) they couldn't rely on outside financing." So they savagely axed jobs, inventories and new investment projects (computers, machinery, and factories).
"Businesses can't cost cut their way to consistent profit growth," argues Zandi. "Eventually, they need to generate revenue growth that requires investment and hiring."
But it's unclear whether corporate elites were so traumatized by the crisis that they've adopted a bunker mentality…paring expenses to maximize profits, hoarding cash to protect against a future financial crisis, waiting to hire until sales improve. Such strategies could sabotage economic recovery.
The full article “The Big Hiring Freeze: Profits are up, buy cost-cutting continues” appeared in Newsweek Magazine on August 2, 2010 (page 26).
Though this entry was made during Summer 2010, it conveys a familiar refrain that has echoed throughout the gradual economic recovery. That is, corporations have recovered via cost cutting, now have reserves to spend on employment, yet are reluctant to do so. Though extended economic stability may be the only thing that lead to corporate spending, it may require the presentation of opportunities that cannot be ignored. Most businessmen are opportunists and when presented with a potentially lucrative opportunity, they act. Regional economic leaders need to identify opportunities may prompt corporate spending in this area and make it part of the appeal.
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