by Reb Akiva at Mystical Paths
[ Worldly Commentary / Opinion ]
Wall Street Journal, "US Banks Post Profit but Woes Persist". As someone who pays attention to macroeconomic details, I'm often asked 'how is it that companies and banks are posting profits, the stock market is up (until last week), yet so many people are unemployed, losing their homes, and having great trouble getting by?'
The answer is one of economic double-speak. Large corporations have staff economists and/or economic consultants. When they see economic trends that will affect their business, they adjust their operations to (try) to meet or handle the new conditions.
Let's take a simple example. The top 3 largest US life insurance companies are posting good profits. And therefore, reacting on the basis of profits, the stocks are up (or holding their own). Yet, sales are down over 50% from 3 years ago! What's going on?
The straightforward answer is, they saw the beginning of the financial crisis and changed how they operate. They laid off employees, in some cases up to 25% of US staff. They cut back on R&D (research and development - future business improvements, investments in technology, etc). They sped up offshoring efforts. They increased workloads on the remaining staff. And they made conscious choices to reduce quality in some areas such as customer service.
The result? They had one year of losses as they took all the charges associated with layoffs (severance pay, unemployment expenses, etc) and of shutting down or pausing R&D efforts and future expansion plans. Then all those "savings" kicked in and now, amazingly in the middle of a severe recession, they're profitable!
Stock goes up, shareholders are happy, executives get bonuses.
The negative impact on the employees laid off, the businesses and vendors impacted by the halted plans, the jobs shipped offshore never to return, are not a major consideration. The wise competitor uses such a period to leapfrog the competition, but this is a risky move that only a few cash rich companies are willing to make.
Of course some business's core functions were too heavily impacted to be able to make such adjustments. The auto industry, home construction, mortgage business, these types of businesses had to make more radical changes and hope business conditions will improve before they run out of resources to continue operating.
We don't expect businesses to consider the employee as a major consideration. Businesses exist to survive and profit.
But you should recognize that when businesses are saying they're profitable, but are half the company they were to do it, it's a pyrrhic victory. Their actual capabilities and value are much less than they were previously.
So when the government is shouting "things are better" but really means we're not losing jobs AS FAST as we were, and when companies are saying "we're profitable" but they've shut down half their operations, there's a lot of stinky brown material being covered over.
Sunday, May 23, 2010
// 5/23/2010 //