rssConsumer Confidence Slumps as Corporate Profits Surge
Wednesday, July 28, 2010 at 10:52 am
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Yesterday, a report from The Conference Board showed that Americans’ confidence in the economy declined again in July, a result of a sluggish recovery and sustained high rates of joblessness. The main consumer confidence index has been falling more sharply than economists expected, from 62.7 in May to 50.4 in July — the lowest reading since February.
At the same time, corporate profits are soaring. But why are companies doing so well if workers are doing so poorly? Essentially, companies have cut costs to buoy profits while demand is falling: If a company’s sales have dropped 10 percent, it has compensated by cutting 15 percent of costs, for example. Additionally, big corporations are making more money overseas.
But rather than plowing profits into hiring, companies are sitting on a $1.8 trillion pile of cash. Ryan Avent flags a good example of the phenomenon:
At Ford, revenue in its North American operations is down by $20 billion since 2005, but instead of a loss like it had that year, the unit is expected to earn more than $5 billion in 2010. In large part, that is because Ford has shrunk its North American work force by nearly 50 percent over the last five years.
What does this mean heading forward? In the short term, nothing good. Consumers recognize the economy is crummy and withhold spending. Companies see no reason to expand: hiring more workers would winnow down their profits. Instead, they are holding cash and rewarding shareholders. Eventually, though, the detente should thaw — companies should start hiring again, meaning more workers spend more cash, meaning sustained corporate profits.
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