Ken’s Take: I think that the realization is setting in that businesses have — partially out of necessity — cut back their bloated cost structures — big time. Short run, it’s out of necessity — just to survive. Medium run, the skinnier cost structures will provide profit leverage when sales start to bounce back. Long-run, companies are will be better positioned to compete.
The downside: there’s little realistic hope for a quick turnaround in unemployment. Companies will be slow to add back to their payrolls — especially given the increased political risk from government intervention, wage controls, and health care taxes and penalties.
If 10% unemployment is the 2010 over/under, I’m taking over.
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Excerpted from WSJ: Cost Cuts Lift Profits But Hinder Economy, Oct. 13, 2009
Corporate America is showing better-than-expected profits, but the accompanying optimism belies deep worries among company executives about the strength of the economic recovery.
In an ominous sign for the economy, much of the profit is being eked out through cost cuts. Executives say they are hesitant to reinvest such profits into their businesses. With large portions of their factories, fleets and warehouses sitting idle, some say they probably won’t see reason to do so for a year or more.
That means job growth and any significant rise in business spending could be a long time coming.
That creates a chicken-and-egg problem at a time when the unemployment rate is already nearly 10%: Without more jobs, U.S. consumers will have a hard time increasing their spending; but without that spending, businesses might see little reason to start hiring.
Already, the economy is being starved of investment it needs to spark growth. Net private investment, which includes spending on everything from machine tools to new houses, minus depreciation, fell to … the lowest level since at least 1947.
“Things have stabilized, but we’re trying to be extremely cautious and not anticipate the recovery before it occurs …we’re looking to cut back as much as possible.”
And while companies are finding the credit-market thaw is making it easier to borrow money they would need to expand, many are stashing these funds rather than spending them. Of the 100 largest bond issues globally this year, only seven listed expansion, investment, capital expenditures or research and development as the purpose of the money-raising.
In industries ranging from apparel to heavy machinery, executives say they don’t yet have enough faith in the recovery to take significant risks.
One big obstacle: Many industries have excess capacity that, even if the economy perks up, will take many months to absorb.
The cautious mood is reflected in companies’ new orders for nondefense capital goods such as computers, trucks and office furniture, which in August were down … about 20% from the same month a year earlier.
“The politicians want people to think things are getting better, because a better mood feeds a turnaround. Things are getting better, but compared to what.”
Full article:
http://online.wsj.com/article/SB125539122868481389.html?mod=WSJ_hps_LEFTWhatsNews
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The Homa Files 