Apartheid

[diehard]

Economic Apartheid.

"Joshua M. Brown is an independent financial advisor and the Author of The Reformed Broker blog.

Burger chains are killing it; neighborhood diners are hurting. Oil and gas companies are raking it in; gas station operators are closing. Mass merchandisers have a new pep in their step; mom and pop retailers can't afford the lease anymore.

Get the picture?

This isn't a class-warfare post, this is a reality check about the Recovery Apartheid*. Large businesses that are asset-rich are benefiting from our Sorcerer's Apprentice-like reflation policies (buckets and buckets sloshing over with corporate welfare). Anyone dependent on actual end-customer demand? Different story. Go ask a sole proprietor doing business on the main drag of your town.

Imagine if, instead of earnings season for the S&P 500, we had a four-week stretch in which we heard from a different sector of small business each night on a series of conference calls. Imagine, if you will, that Monday night we heard from local restaurant and catering companies throughout the nation, then on Tuesday night we heard from auto dealerships, Wednesday night was machine repair shops, Thursday was real estate agencies, etc.

With my hypothetical Small Business Earnings Season in mind, I ask you the following ... would the stock market have just posted an almost 4% gain since July 13 had that been the case? Would anything said by a majority of America's business owners on conference calls each night even come close to matching the positivity on the Alcoa and the Intel calls that kicked this earnings season off?

Probably not. Because away from the S&P 500, record-breaking cash hoards are not the norm for business owners, nor are trips to the Fed's discount window or financings done in a bond market voracious for yield of any kind.

Here's what the real "norm" is for small company owners these days, according to the latest NFIB Small Business Optimism survey, "the score of business owners who have reported higher nominal sales over the past three months fell by four points and now stands at a net negative 15 percent."

English translation: Nobody's buying nothing.

Higher taxation and/or health care costs are an annoyance for a large cap, public company. They may limit profitability and even necessitate charges, but they do not represent an endgame. Health care hikes and additional taxation can be a death sentence for many smaller companies, however.

Combine these obstacles with a lack of access to liquidity and capital markets and you have an almost perfectly segregated recovery, a literal apartheid keeping giant swathes of the population on the outside of the rebound looking in.

The best case going forward is that an improving picture for S&P 500 companies and other large entities leads to a dramatic boost and turnaround for the rest of the economy. The worst case is that the benefits of asset-price reflation and inventory restocking do not last much longer, and in hindsight, we find that the Recovery Apartheid was merely a temporary divide -- that the big boys were just better at pretending they were recovering than their small company cousins.

We shall see.

*Author's note - Yes, I came up with the term "Recovery Apartheid" but you can totally use it because it is literally a perfect descriptive term for this business climate and it should one day appear in economics textbooks."

http://blogs.forbes.com/streettalk/2...mepagechannels

[From the Barn]

A very poor understanding of apartheid to say the least.

[UpnorthGo4]

The Big Hiring Freeze
Profits are Up, but Cost-Cutting Continues
By: Robert J. Samuelson
Newsweek
http://www.newsweek.com/2010/07/23/t...ng-freeze.html

Judging from corporate profits, we should be enjoying a powerful economic recovery. During the recession, profits dropped by about a third, apparently the worst decline since World War II. But every day brings reports of gains. In the second quarter, IBM’s profits rose 9.1 percent from a year earlier. Government statistics through the first quarter (the latest) show that profits have recovered 87 percent of what they lost in the recession. When second-quarter results are tabulated, profits may exceed their previous peak.

The rebound in profits ought to be a good omen. It frees companies to be more aggressive. They’re sitting on huge cash reserves: a record $838 billion for industrial companies in the Standard & Poor’s 500 Index (companies like Apple, Boeing, and Caterpillar) at the end of March, up 26 percent from a year earlier. “They have the wherewithal to do whatever they want—hire, make new investments, raise dividends, do mergers and acquisitions,” says S&P’s Howard Silver-blatt. Historically, higher profits lead to higher employment, says Mark Zandi of Moody’s Economy.com. Except for startups, loss-making companies don’t generate new jobs.

So far, history be damned. The contrast between revived profits and stunted job growth is stunning. From late 2007 to late 2009, payroll employment dropped nearly 8.4 million. Since then, the economy has recovered a scant 11 percent of those lost jobs. Companies are doing much better than workers; that’s a defining characteristic of today’s economy.

The most obvious explanation is that the relationship between labor and capital (to borrow Marxist vocabulary) has changed. Capital has gotten stronger; labor has weakened. Economist Robert J. Gordon of Northwestern University argues that the “shift of executive compensation towards much greater use of stock options” has made corporate managers more zealous cost-cutters in recessions and more reluctant hirers early in recoveries. Lowering the head count is the quickest way to restore profits and, from there, a company’s stock price.

In a new paper, Gordon dates the economy’s changed behavior to the 1980s. Until then, companies tended to protect career workers. Since then, “jobless recoveries” have become standard. After the 1990–91 recession, consistent employment growth did not resume for about a year; the lag was nearly two years after the 2001 recession. (The National Bureau of Economic Research, an economists’ group, determines the end of recessions, usually when economic output begins expanding. Job growth does not automatically coincide with output expansion. The difference reflects productivity gains—greater efficiency, or more output per worker.)

Aside from executives’ stock options, Gordon cites weaker unions and more competition from both imports and immigrants as subverting workers’ bargaining power. History also matters. The harsh 1981–82 recession threatened the survival of many firms. The near-death experience made managers more open to bigger layoffs. What started as a last resort slowly became routine. There was a generational change, too. Depression-era CEOs, highly sensitive to job insecurity, retired. Younger executives worried more about competitive challenges and corporate takeovers.

In hindsight, the massive job cuts of 2008 and 2009 should not have been surprising. “With the collapse of the financial system,” says economist Lynn Reaser of Point Loma Nazarene University in San Diego, “companies had to conserve cash desperately, [because] they couldn’t rely on outside financing.” So they savagely axed jobs, inventories, and new investment projects (computers, machinery, factories). From the fourth quarter of 2008 through the second quarter of 2009, business investment dropped at annual rates of 24 percent, 50 percent, and 24 percent. Nothing like that had occurred since at least the 1940s, Gordon notes.

“Businesses can’t cost cut their way to consistent profit growth,” argues Zandi of Moody’s Economy.com. “Eventually, they need to generate revenue growth that requires investment and hiring.” There are some favorable signs. Companies seem to have stepped up the replacement of aging computers; that could create new jobs. General Electric says its research-and-development budget is up 18 percent since 2006 and supports new products from batteries to solar films.

But it’s unclear whether corporate elites were so traumatized by the crisis that they’ve adopted a bunker mentality. That, as much as uncertainty over Obama’s policies, is fearsome. If labor is cowed and capital is overcautious, the recovery must suffer.

[UpnorthGo4]

Consumer Confidence Falls As Corporate Profits Rise
ANNE D'INNOCENZIO
Associated Press
07/27/10

http://www.huffingtonpost.com/2010/0..._n_661601.html


NEW YORK — The disconnect between Wall Street and Main Street is growing. Americans' confidence in the economy faded further in July, according to a monthly survey released Tuesday, amid job worries and skimpy wage growth.

That's at odds with Wall Street's recent rally fueled by upbeat earnings reports from big businesses such as chemical maker DuPont Co. and equipment maker Caterpillar Inc. That's because the pumped-up profits are being fueled by cost cuts like layoffs and overseas sales. In fact, big companies have shown few signs they're ready to hire.

The Consumer Confidence Index came in at 50.4 in July, a steeper-than-expected decline from the revised 54.3 in June, according to a survey the Conference Board. The decline follows last month's decline of nearly 10 points, from 62.7 in May, and is the lowest point since February. It takes a reading of 90 to indicate a healthy economy – a level not seen since the recession began in December 2007.

"Consumers have a much different view of the economy than the stock market does, and their views matter more to the economy," said Mark Vitner, an economist at Wells Fargo. The index "tells me the economy is heading for slower growth in the second half. We have low expectations for back-to-school."

Joel Naroff, president of Naroff Economic Advisors, agreed, noting that the fatter profits have shown that companies have been able to squeeze out higher productivity from workers, but that also means that "households are not benefiting." The profit picture is "good news for Wall Street, but not good for workers," he added.

The survey was taken July 1-21, beginning just before the Standard & Poor's 500 index hit a nine-month low of 1,022.58 on July 2. It had risen 4.5 percent by July 21 and has since climbed an additional 4 percent as upbeat earnings reports from key manufacturers have made investors more convinced that the economic recovery isn't stalling as much as they had originally thought.

The Dow Jones industrial average rose 12 points Tuesday, although broader stock measures slipped, after three days of big gains, as investors digested the confidence data as well as a slowdown in regional manufacturing reported by the Richmond Federal Reserve. Stocks rose moderately at the open because of strong earnings from chemical maker DuPont Co. and European banks UBS and Deutsche Bank.

DuPont, which has announced thousands of job cuts over the past year, reported that second-quarter income nearly tripled, as revenue surged in most of its businesses. The results were led by revenue gains in the Asia Pacific region. DuPont didn't announce any hiring plans.

A rapid, sustainable recovery can't happen without the American consumer. And the second straight month of declining confidence following three months of increases is worrisome, economists say. Economists watch confidence closely because consumer spending accounts for about 70 percent of U.S. economic activity and is critical to a strong rebound.

Both components of the index declined. They measure how people feel about the economy now, and their expectations for the next six months.

The index – which measures how Americans feel about business conditions, the job market and the next six months – had been recovering fitfully since hitting an all-time low of 25.3 in February 2009. The index typically falls before the economy slows down, and on the way out of a recession, the expectations component, which accounts for 60 percent of index, rises sharply, said Lynn Franco, director of The Conference Board Consumer Research Center.

"It's all about jobs. That's still the primary source of income," Franco said. "Until we see the pace of job growth pick up and consumers are confident that this is sustainable, we are not likely to see a significant pickup in confidence."

The Conference Board survey, based on a random survey mailed to 5,000 households, showed that consumers' assessment of the job market was more negative than the month before. Those claiming that jobs are "hard to get" increased to 45.8 from 43.5 percent, while those saying jobs are "plentiful" remained unchanged at 4.3 percent.

Michelle Banks, 38, a teacher from Bloomfield, N.J., said she's more worried about job security than she was last year because of rampant state budget cuts. So she started saving money for back-to-school items for her 5-year-old son in January. She plans to spend $200, evenly divided between school supplies and clothing.

"I'm buying clothes that will last, not fall apart," she said.

Economists say the index's expectations component tends to track stock market movements, but Vitner noted that the market's big plunge in May has made such an imprint on consumers that the recent rebound hasn't registered.

Retailers had a surprisingly solid start to the year, but business has been slowing since April. With unemployment stuck near 10 percent, Americans are expected to remain skittish through the back-to-school and Christmas season.

Concerns are also rising about the housing market. While the S&P/Case-Shiller 20-city home price index released Tuesday showed a 1.3 percent rise in May from April, the home buyer's tax credit, which expired April 30, helped pull more buyers into the market. In fact, the report warned that the recent gains in home prices are not likely to last.

___

[NateDawgUM]

Originally Posted by UpnorthGo4

So far, history be damned. The contrast between revived profits and stunted job growth is stunning. From late 2007 to late 2009, payroll employment dropped nearly 8.4 million. Since then, the economy has recovered a scant 11 percent of those lost jobs. Companies are doing much better than workers; that’s a defining characteristic of today’s economy.

The problem here is that most companies had so much dead weight leftover from the pre-computer age. Computers have made us vastly more efficient at our white collar jobs. How many people were spending 8 hours a day doing 2 hours of work?

I mean, look how many people post 20x a day on the GopherHole during typical work hours?

So, these jobs were cut when we hit "The Great Recession" and companies productivity hardly took a hit by spreading more work to less employees.

I understand the irony of me posting about this while I'm at work, but I'm moving toward a different job at this company very soon so expect a lot less of my posts during work hours.

[UpnorthGo4]

Originally Posted by NateDawgUM

The problem here is that most companies had so much dead weight leftover from the pre-computer age. Computers have made us vastly more efficient at our white collar jobs. How many people were spending 8 hours a day doing 2 hours of work?

I mean, look how many people post 20x a day on the GopherHole during typical work hours?

So, these jobs were cut when we hit "The Great Recession" and companies productivity hardly took a hit by spreading more work to less employees.

I understand the irony of me posting about this while I'm at work, but I'm moving toward a different job at this company very soon so expect a lot less of my posts during work hours.

I agree with everything you said and it is just one more reason why the jobs that have been lost will not come back anytime soon. It doesn't matter who is running the country. I think what we are seeing is a fundamental change in how companies do business. Lowering the tax rates is not going to change what is going on. Americans are going to be in for a rough ride for the next 5 to 10 years so fasten your seatbelts.