Thursday, April 15, 2010

How high unemployment saved the economy.

By reducing costs for corporate America, of course. In 2009 Corporate America, in the form of the Fortune 500, saw its second largest annual increase in profits in the list's 56 year history. mostly this was achieved through ruthless cost cutting of labor expenses.

For 2009, though, the big story is how the Fortune 500 managed that jump in earnings when the number that usually pulls profits up or down -- revenues -- dropped sharply. Last year, Fortune 500 sales fell 8.7% to $9.8 trillion, the largest percentage decline since 1983. It was the frantic response to falling sales that laid the groundwork for the earnings renaissance.

In late 2008 and early 2009, volumes and prices, two contributors to sales, both shrank drastically as GDP contracted at an incredible rate of around 6%. Fearing the onset of a depression, companies raced to lower expenses even faster. "Producers practically panicked," says Mark Zandi, chief economist at Moody's Analytics. "They cut costs incredibly aggressively."

The crucial reductions came in the item accounting for two-thirds of their costs: labor. In 2009, the Fortune 500 shed 821,000 jobs, the biggest loss in its history -- almost 3.2% of its payroll. By mid-2009, companies were making fewer goods with far fewer workers.

A pivotal turn began midyear. Sales bottomed, then began to rise gently, as headcounts continued falling. "The largest part of the gain came from lower payrolls rather than the sluggish rise in sales, but they both contributed," says Dirk van Dijk of Zacks Equity Research. The result was a wondrous surge in productivity, defined as the hours needed to make a bicycle, a PC, or a ton of insulation.

At the same time, wages rose only slightly. So for all of U.S. industry, the labor costs of creating a good or service -- a measure known as unit labor costs -- fell by 4.6%, according to the U.S. Department of Labor. That's the sharpest drop in postwar history.

As sales started rising in the second half of 2009, all of the extra revenues and cost reductions fell to the bottom line. Today employers are maintaining the super-low cost regimes they imposed during the crisis while the economy is finally growing. That explains the explosion in Fortune 500 profits. [emphasis added]
So next time you hear that we're in a recovery, remember that it was achieved by slashing headcount and payroll, and that the resultant productivity gains mean the corporations aren't likely to rehire anyone soon. Nor will they have to give people pay raises, because someone else out there will be willing to do the job.

Once again, the middle gets squeezed out. But hey, green shoots! Recovery! Happy days are here again!