[Marxism] "Creative destruction" not so creative

Louis Proyect lnp3 at panix.com
Mon Jul 26 06:01:39 MDT 2010


NY Times July 25, 2010
Industries Find Surging Profits in Deeper Cuts
By NELSON D. SCHWARTZ

By most measures, Harley-Davidson has been having a rough ride.

Motorcycle sales are falling in 2010, as they have for each of the last 
three years. The company does not expect a turnaround anytime soon.

But despite that drought, Harley’s profits are rising — soaring, in 
fact. Last week, Harley reported a $71 million profit in the second 
quarter, more than triple what it earned a year ago.

This seeming contradiction — falling sales and rising profits — is one 
reason the mood on Wall Street is so much more buoyant than in 
households, where pessimism runs deep and joblessness shows few signs of 
easing.

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.

As companies this month report earnings for the second quarter, news of 
healthy profits has helped the stock market — the Standard & Poor’s 
500-stock index is up 7 percent for July — but the source of those gains 
raises deep questions about the sustainability of the growth, as well as 
the fate of more than 14 million unemployed workers hoping to rejoin the 
work force as the economy recovers.

“Because of high unemployment, management is using its leverage to get 
more hours out of workers,” said Robert C. Pozen, a senior lecturer at 
Harvard Business School and the former president of Fidelity 
Investments. “What’s worrisome is that American business has gotten used 
to being a lot leaner, and it could take a while before they start 
hiring again.”

And some of those businesses, including Harley-Davidson, are preparing 
for a future where they can prosper even if sales do not recover. 
Harley’s goal is to permanently be in a position to generate strong 
profits on a lower revenue base.

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.”

The trend is hardly limited to Harley. Giants like General Electric and 
JPMorgan Chase, as well as smaller companies like Hasbro, the toymaker, 
all improved their bottom lines despite slowing sales in the second 
quarter. Among the S.& P. 500 companies that have reported 
second-quarter results, more than one in 10 had higher profits on lower 
sales, nearly twice the number in a typical quarter before the 
recession, according to Thomson Reuters.

“Whole industries are operating at new levels of profitability,” said 
David J. Kostin, chief United States equity strategist at Goldman Sachs. 
“In the downturn, companies managed to maintain higher profit margins 
than ever before.”

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.

Even if sales do improve, a surge in hiring is unlikely.

“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.

Harley’s evolution is part of longer-term shift in American 
manufacturing, said Rod Lache, an analyst with Deutsche Bank.

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.

“These companies have cracked the code of a successful industrial 
turnaround,” Mr. Lache said. “They’re shrinking the business to a size 
that’s defendable, and growing off that lower base.”

To be sure, sales are rising for many companies, albeit at a much slower 
pace than the increase in profits. Among the 175 companies in the S.& P. 
500 that have reported earnings for the second quarter, revenues rose 
6.9 percent on average while profits jumped 42.3 percent, according to 
Thomson Reuters.

Still, even at corporations where both the top and bottom lines are 
expanding, the focus remains on keeping profits high, not rebuilding 
work forces decimated by the recession.

When Alcoa reported a turnaround this month in profits and a 22 percent 
jump in revenue, its chief financial officer, Charles D. McLane Jr., 
assured investors that it was not eager to recall the 37,000 workers let 
go since late 2008. “We have a tight focus on spending as market 
activity increases, operating more effectively and minimizing rehires 
where possible,” he said. “We’re not only holding headcount levels, but 
are also driving restructuring this quarter that will result in further 
reductions.”

Michael E. Belwood, a spokesman for Alcoa, said more than 17,500 of the 
former workers were employed at units Alcoa has since sold, but added 
that the company “had to be resized to match the realities of the 
recession.”

“We’re keeping a close eye on costs because there is still uncertainty 
about the stability of this recovery,” he said.




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