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Record Corporate Profits Are Not Lowering Unemployment Rate

U.S. corporations are making record profits quarter after quarter, yet unemployment seems to be stuck at a devastatingly high rate. Why aren’t these financially flush big businesses hiring?

I’ve been writing a string of blogs about how tax debts are dealt with in bankruptcy, and I’ll get back to that after today. This is the time of year when the nation’s major corporations report their 3rd quarterly profits, and so I found myself scratching my head about the disconnect between their huge profits and their lack of hiring. So I read a number of news stories and editorials and this is what I got out of them:

1.  Big businesses have gotten to be more “productive,” in the sense of producing more goods and services with less labor. That has happened partly through investments in labor-saving technology and partly by requiring employees to work harder and faster for the same pay. With the cut-throat labor market, companies don’t need to increase salaries to retain or replace their employees.

2.  Profits have increased because a larger percentage of sales for large U.S. corporations have been overseas. Around 40 per cent of their profits are from foreign sales. For many companies, sales are growing modestly in the U.S. while growing much faster elsewhere, especially in the “emerging markets” of China, India, and South America.  

3.  Relatively strong overseas sales come with job growth overseas instead of here. According to the U.S. Commerce Department, in the past decade, U.S.-based multi-national corporations added 2.4 million jobs outside the country while cutting 2.4 million jobs here. Jobs naturally grow where sales are growing–someone has to take customer orders at the 3,000+ KFCs in China! But of course there’s also increased foreign outsourcing of work that used to be done here, from manufacturing to computer programming.

4. Normally when businesses are more productive, resulting in more profits, they tend to expand, thus creating more employment opportunities. But this has not been happening for three reasons.

a. With the double-whammy of very high unemployment and loss of home values, U.S. consumers either don’t have the means or the attitude to spend money, so companies are leery about expanding to increase production.

b. The international business environment—particularly the European sovereign debt crises in Greece, Italy and elsewhere—is making big business cautious.

c. Political gridlock in Washington, D.C. makes business planning very difficult. With the Congressional deficit-reduction “super committee” scheduled to issue its report very shortly, big businesses have been sitting tight to see if this “super committee” will come up with its momentous compromise, and what it’ll consist of.

The bottom line: big businesses don’t need to hire to produce the goods and services they are producing, at least within the U.S., and they don’t want to expand and hire here because of lackluster consumer demand and high uncertainty in the world economy and in domestic politics.

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Luxury Sales–Some Very Tangible Evidence of the Widening Income Gap

Luxury Sales—Some Very Tangible Evidence of the Widening Income Gap

Rich Americans are buying again. The rest of us—not so much. The difference between the sales figures at luxury stores versus middle- and low-end ones is stark evidence showing who has been coming out of the Great Recession doing pretty well and those who have not.

An article in the business section of the New York Times a couple of weeks ago made the point that “the retail economy is locked on two tracks: one for businesses that cater to the well-to-do, and the other for everyone else.”

On the low-to-medium end, retailers such as Target and JC Penney posted modest single-digit gains for sales in July compared to a year ago, while others such as Kohl’s actually had lower sales this July than last. On the higher end, it seems like the more luxury-oriented to store, the better the improvement in sales. Nordstrom sales were up 6.6% this July, Neiman Marcus up 7.7%, and Saks Fifth Avenue up a whopping 15.6%.

The article I referred to above points out some ways that retailers see what’s going on inside the wallets of their customers, particularly the low- to average-income shopper. They see a pronounced dip in sales in the weeks or days before shoppers’ paydays. People have less discretionary income, and tend to be living paycheck to paycheck.  And instead of buying clothing and other seasonal items as much for upcoming seasons, more people tend more to buy only what they need when they need it. This also enables them to take advantage of seasonal sales. In turn these retailers have to cut their prices to bring in shoppers, which lowers their gross receipts.

In contrast, luxury stores are now able to sell much more of their merchandise without discount, and have even been able to increase their prices. According to Saks Fifth Avenue’s chief executive Stephen Sadove, “There’s a dramatic decline in the amount of promotions in the luxury sector — we’re seeing higher levels of full-priced selling than we saw prerecession.” Example: their Christian Louboutin “Bianca” platform pumps just about sold out, at full price, for $775 a pair. And while three years ago his store’s most expensive Louboutin suede boots cost $1,575, the top of the line  version now sells for $2,495.

But before we get out our pitchforks to storm the gated mansions of the wealthy, here’s a bit of reality to chew on: “the top 5 percent of income earners accounts for about one-third of spending, and the top 20 percent accounts for close to 60 percent of spending,” said Mark Zandi, chief economist of Moody’s Analytics. “That was key to why we suffered such a bad recession — their spending fell very sharply.”

Sounds like we need the wealthy to continue their spending.

It sure doesn’t feel like it, especially during this maddeningly slow “recovery,” but it’s true: we’re all in this together.

 

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