Industries Find Surging Profits in Deeper Cuts

New York Times (Schwartz) - 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. Harley, for example, has announced plans to cut 1,400 to 1,600 more jobs by the end of next year. That is on top of 2,000 job cuts last year — more than a fifth of its work force.

In some ways, the ability to raise profits in the face of declining sales is a triumph of productivity that makes the United States more globally competitive. The problem is that companies are not investing those earnings, instead letting cash pile up to levels not reached in nearly half a century.  “As long as corporations are reinvesting, the economy can grow,” said Ethan Harris, chief economist at Bank of America Merrill Lynch. “But if they’re taking those profits and saving them, rather than buying new equipment, it hurts overall growth. The longer this goes on, the more you worry about income being diverted to a sector that’s not spending.”

“There’s no question that there is an income shift going on in the economy,” Mr. Harris added. “Companies are squeezing their labor costs to build profits.”


Profit margins — the percentage of revenue left over after expenses — crumble in most recessions, as overall sales fall but fixed costs like infrastructure, commodities and rent remain the same. 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.

Harley-Davidson’s profit gain last quarter was helped by a turnaround in its financing unit, as well as more efficient production, but the company is still cutting. Harley has warned union employees at its Milwaukee factory that it would move production elsewhere in the United States if they did not agree to more flexible work rules and tens of millions in cost-saving measures.
“The last thing we’re worried about is when are we going to have to add more capacity, because what we’re really doing is reconfiguring our entire operational system for greater flexibility,” Keith Wandell, the company’s chief executive, said on a conference call with analysts last week.