Apr 112012

“For Big Companies, Life is Good.” That was the headline on the Marketplace Section front page of the Wall Street Journal April 9.

The item reported that sales, profits and employment of the largest American companies, the Standard and Poor’s 500, last year exceeded the highs reached before the Great Recession (December 2007-June 2009). These companies have reduced debt and are rolling in cash.

The companies generated revenue of $420,000 per employee last year, up $378,000 in 2007. Here are some other particulars from the Journal’s text and charts: Net income of the S&P 500 in 2011 was up 22.7% from 2007, cash up 49.4% ($1.2 trillion more), capital spending up 16.3%. But employment was up only 5.1%, and the Journal’s article and graphic both noted that much of the job growth occurred outside the U.S.

The Journal’s survey covered 468 of the 500 companies, excluding those which had not filed annual reports by its deadline. The analysis may overstate the health of corporate America because it excludes duds like Lehman Brothers Holdings and Circuit City Stores (both bankrupt) and Annheuser-Busch, the beer giant now owned by the Dutch.

Life is good for the S&P 500. For the rest of us, not so much. The stock market’s reaction to Fed minutes released on April 3 and the Good Friday report on U.S. employment in March indicate that the U.S. economy is not strong enough on its own to reach “escape velocity,” a self-sustaining recovery. It has to be propped up by the Fed. Since the Fed can’t lower interest rates below zero, it has been doing this by printing money, also known as Quantitative Easing, or QE.

The U.S. economy created only 120,000 new jobs in March, way short of the 200,000+ of the previous three months. The U.S. unemployment rate fell slightly, to 8.2%, but that was partly because more and more people, discouraged at job prospects, are dropping out of the labor force.

Teresa Tritch, a member of the editorial board of the New York Times, in an op-ed on April 8 cited the left-leaning Economic Policy Institute’s calculation that at the average rate of job creation the past three months it will be 2017 before the U.S. economy has created enough jobs to replace those lost in the Great Recession and accommodate new entrants into the labor force.

Yes, the housing market seems to be groping for a bottom; housing starts are up more than 40% from the nadir, and other measures of activity are off the bottom. But Tritch reports that average equity per homeowner has fallen from nearly $200,000 at peak in 2006 to $78,000, the lowest since 1968.

Tritch has a point when she writes that

Without a revival in jobs, income and home equity, other indicators of recovery — like a rising stock market and more consumer spending — largely reflect gains among the top echelon of earners. Such lopsided growth can make for good numbers, but doesn’t presage broadly higher living standards.

For the U.S. economy, lurking in the background is what economists are starting to call a “fiscal cliff.” Without congressional action before the end of this year, the Bush tax cuts will expire and mandatory spending cuts will kick in. The resulting contraction would cut GDP by anywhere from 3% to 5%. That kind of decline would push an economy growing only 2-3% a year into recession.

If there is any consolation, things don’t look much better elsewhere. Europe is trying austerity, and it isn’t working. Even the prosperous parts of Europe (e.g., Germany) are in recession. Yields are rising on the government bonds of Spain, a reminder that Europe’s version of QE, known as LTRO (Long Term Refinancing Operation), which has pushed cheap money out to banks for three years at 1% interest, has merely kicked the can down the road rather than solved the structural problems bedeviling Europe’s peripheral economies.

Japan is getting older, its population is declining, and it has twice the level of debt in relation to the size of its economy as the U.S. China, now the world’s second largest economy, is throwing off mixed signals. Some days the indicators seem to point to a soft landing, others not so much. And the decrepit, corrupt political system seems to be creaking as the time approaches for handing over leadership to a new generation. In what is characterized as China’s most serious political crisis in more than two decades, provincial official who was to have attained a Politburo seat has been stripped of his office and his glamorous wife arrested for the murder of a British businessman, a resident of China who had been close to the family.

Any good news? Here’s a phenomenon to ponder: China has become the largest source of foreign-exchange students for the U.S., the U.K., Canada and Australia, generating revenue of $2.5 billion a year between tuition on fees. The Financial Times reports that Canada takes in more by hosting Chinese students than from any other area of trade with China, including natural resources. Canada in effect is exporting education to China but keeping the jobs in Canada. Other countries hosting Chinese students are doing the same. What’s not to like about that?

This Chinese student diaspora is likely to demand political change when it returns home. A song written in 1918 after U.S. entry into World War I comes to mind. The chorus went, “How ‘ya gonna keep ’em down on the farm? After they’ve seen Par-ee.”

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