Earnings Season Shows Need For U.S. Corporate Restructuring

| About: SPDR S&P (SPY)

Summary

A large number of first quarter earnings reports point to corporate efforts to restructure their companies as profits are not doing all that well.

In most cases, managements had assumed that the economic climate after the Great Recession would be the same as it has been over the past fifty years or so.

What these managements have found, after almost seven years of economic recovery, is that the world is not the same and adjustments must be made to business models.

This earnings season has clearly given evidence to the fact that corporations in the United States, both financial as well as non-financial, are either restructuring and need to restructure.

Evidence of this is all over the place. Two pieces in the Wall Street Journal about Intel Corp. (NASDAQ: INTC) point to the need for such changes. See, for example, the short piece by Dan Gallager, "Intel's Reboot: What Comes After Job Cuts." Then there is the article on Intel's first quarter earnings, "Intel Cuts 12,000 Jobs, Puts Focus on Cloud."

Don Clark follows up these articles by claiming "Mobile and Cloud Shifts Slam Old Guard."

This is true of banking as well. It was the focal point of Nathaniel Popper's article in the New York Times where Mr. Popper begins his coverage of first quarter earnings for Goldman Sachs Group, Inc. (NYSE: GS) by writing:

"Goldman Sachs has been betting that it will again see around the next corner better than its competitors.

As other large banks have been cutting back the trading and investing businesses that have long defined Wall Street, Goldman has fearlessly stuck to its guns.

But after Goldman on Tuesday delivered the worst first-quarter results of any major bank - the latest of many challenging quarters - the firm faced some tough questions about whether a raft of changes in regulations and financial markets might be making its focus on Wall Street businesses the wrong bet."

This restructuring has hit organizations like General Electric (NYSE: GE) where CEO Jeff Immelt has been refocusing GE by eliminating its reliance on it financial divisions so as to concentrate more on its basic business.

GE built up its financial business to the point where more than 50 percent of its profits were coming from the financial side of the business. This expansion came during the periods of credit inflation that dominated the last forty years of the previous century.

But, times have changed.

As Mr. Clark highlights in his article cited above, mobile devices and cloud computing has significantly changed the fundamentals in information technology.

Steven Russolillo is now claiming about "How Microsoft is Reclaiming Its Former Glory" by moving into the cloud.

In banking, not only has the Dodd-Frank legislation changed the banking industry, but also the changes occurring because of the invasion of FinTech into the financial world is really beginning to shake up things.

I have also written "Big Banks Must Change Business Models to Survive."

All this information is important because it points to the fact that the United States economy, as well as the world economy, is going through a transition period where restructuring seems to be the key.

The current economic recovery is now almost seven years old, but the economy has grown at a compound rate of growth just a little above 2.0 percent during this recovery.

This need for restructuring is a major reason why the growth rate has been so low compared with what was achieved in the last half of the twentieth century.

It has taken a while for corporate America to fully appreciate the changes that have been taking place. Coming out of the Great Recession, the government attempted to stimulate the economy through greater fiscal deficits. The Federal Reserve followed up on this effort by going through three rounds of quantitative easing.

It seemed as if things were proceeding, as usual, and the economic stimulus would return things to the way they were and people would be put back into the jobs they lost during the economic downturn.

But, something was different this time. The economy did not fully recover as it had in the past. The capacity utilization of manufacturers did not return at all to previous levels and this, plus the uncertainty of the situation, held corporations back from investing in physical capital as they usually did during economic recoveries.

Things were different.

Now, we are seeing in the earnings performance of companies that something more needs to be done to change the focus of executives to this new world situation. More emphasis must be placed upon restructuring their businesses to incorporate the changed environment to return earnings to a more vibrant level.

The thing is, that during this restructuring period, the economy will not grow as fast as it did in the past. Notice that Intel was laying off 12,000 people. The banks are cutting back on employment. And, a pickup in investment in physical capital will be slow as corporations discern what the new environment really means for them.

Economic growth will eventually increase. Corporate earnings will eventually pick up. But, this restructuring process takes time because it is really a trial and error effort. Unfortunately, patience is not a universal trait of either investors or of elected government officials.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.