A surge in corporate profits and record levels of cash on corporate balance-sheets has raised hopes in some quarters that employers will soon embark on a new round of hiring. General Electric (NYSE:GE), the conglomerate regarded as a bellwether for the US economy, lifted net income by 14% in the second quarter of 2010 and raised its dividend, which had been cut in the recession. Even two of the three embattled Detroit carmakers, General Motors (NYSE:GM) and Ford (NYSE:F), reported sizable profits.
Typically, these profits would sooner or later be translated into more jobs, either through direct hiring or more investment. But optimism on this score may be misplaced. Much of the improvement in the bottom line has come from operations outside the US. For example Wal-Mart (NYSE:WMT), a giant retailer, reported that international sales rose by 11% in the second quarter whereas domestic sales shrank by 1.8%.
Furthermore, many companies are hoarding their extra cash for the time being rather than using it to hire more workers. In many cases, the jump in profits has been attributable to cost-cutting and improved productivity.
According to Thomson Reuters, more than one in ten companies has posted higher profits despite lower sales. GE was a case in point, with a 4% drop in revenue, despite the double-digit profit increase. Businesses appear to have already reaped most of the productivity gains typically achieved in the early stages of a recovery. According to the Labor Department, productivity declined in the second quarter by 0.9% at an annual rate. The drop, the first since late 2008, was ascribed both to slower output growth and rising labor costs. (Click to enlarge)
The risk of a double-dip recession and, worse, a prolonged period of deflation has loomed larger in recent weeks. James Bullard, president of the St Louis Federal Reserve, warned in mid-July that the US is “closer to a Japanese-style outcome today than at any time in recent history”. Mr. Bernanke reinforced this bearish view, cautioning that the economy had a long way to go to full recovery.