Thanks for nothing, Corporate America

chart_corporate_profits.top.gif By Paul R. La Monica, assistant managing editor


NEW YORK (CNNMoney.com) -- If you're a CEO of a major company you probably have a lot to be thankful for on Turkey Day. The government reported Tuesday that corporate earnings hit a record in the third quarter.

Businesses collectively posted profits of $1.67 trillion, according to the Bureau of Economic Analysis. That's up 28% from a year ago.

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But this is hardly cause for celebration. The surge in profits isn't doing much to boost the economy.

Gross domestic product rose at just a 2.5% annualized clip in the third quarter. The good news is that's better than an earlier estimate of 2%. The bad news is that this level of growth is still subpar, especially coming off a series of gigantic quarterly declines in GDP in 2008 and 2009.

What's more, the labor market is far from being healthy. Sure, initial claims are at their lowest level in about two and a half years.

But the unemployment rate has been stuck at 9.6% for the past three months and few expect it to fall below 9% anytime soon. Heck, the Federal Reserve even indicated Tuesday that unemployment is unlikely to return to a more normal rate of around 7% until 2013.

This is, to put it mildly, troubling.

It will be difficult for the economy to improve in a meaningful way until there are fewer people out of work. Unemployed consumers clearly need to watch their budgets. And even people with a steady paycheck are not likely to spend a lot if they are worried about their own job security.

But companies won't feel compelled to add to their payrolls until they are confident that consumers are going to spend a lot more -- which probably won't happen until the job market improves.

So Corporate America faces the proverbial chicken vs. egg conundrum.

They can continue to cut expenses to the bone and work existing employees even harder. Hooray for productivity gains!

Or companies can start hiring more people with the hopes that more gainfully employed Americans eventually will lead to higher demand for their products and services. Good luck with that.

Companies can point to the fact that demand isn't robust enough to add more staff. According to estimates from Thomson Baseline, revenues for companies in the S&P 500 are expected to increase, on average, by 9% in 2010. But sales growth is forecast to slip to 7% next year.

"Revenue growth is still sluggish so companies think the lack of hiring is a rational response," said Peter Cohan, president of Peter S. Cohan and Associates, a venture capital and management consulting firm in Marlborough, Mass.

"Companies are going to squeeze more out of their existing work force. The pressure is on workers since unemployment is so high. People have to grin and bear it," Cohan said.

Jason Tyler, senior vice president and director of research operations at Ariel Investments in Chicago, agrees.

Tyler points out that as long as the average American worker is nervous about the economy, spending won't rebound strongly enough to make companies consider major headcount expansions.

"I don't think that we are going to see hiring coming back fast. It will take a long time to get back to what everyone will consider a good job market," he said.

"It's not just the fact that about 9.5% of people are out of work but the effect it has on people that are employed. Spending is so dramatically reduced by fears of losing a job and not being able to replace it," he added.

So is there any good news about the job market and economy to be gleamed from record profits? Yes. Cohan said one reason companies are doing well is because of stronger demand from emerging markets like China, India and Brazil.

Cohan said companies will need to hire more people if they want to continue expanding in those hotter growth markets. The catch, of course, is that many of the jobs will be in those local markets.

But if U.S.-based multinationals are going to make a bigger effort to sell their wares abroad, surely they will need some people in the United States. And if a couple of big firms start hiring more workers, other companies could soon do the same.

"If you notice anything about how corporations work, it's that businesses do have a certain herd mentality," said Cohan. "If one company does something, others quickly follow. That's usually what happens."

Tyler isn't so sure. He said that companies are likely to remain enamored with their expanding earnings and will be unwilling to spend a lot more on new employees until they're certain the economy is really on the mend.

"Earnings can keep growing at a good rate longer than people think. Small revenue gains can lead to dramatic profit gains," he said. "The reason is that companies are still so shell-shocked because of the recession. Nobody wants to add a lot of expenses," he said.

"Profit growth is going to be a lot faster than GDP growth for a long time," Tyler added.

In other words, corporate executives can count their blessings this holiday season. And they probably will again next year. Too bad it may be at the expense of the rest of us.

Gobble gobble gobble. Have a Happy Thanksgiving, everyone. The Buzz will be back on Tuesday, November 30.

- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney.com, and Abbott Laboratories, La Monica does not own positions in any individual stocks.  To top of page

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