Good Time To Be a Squeezer, Bad Time To Be a Lemon

Woooo-hoooo, people, pop open the champagne! US companies are making money hand over fist and are sitting on "mountains of cash." "How is this possible in a time of massive unemployment," you ask? Easy -- it's because of massive unemployment that companies are making so much money. They figured out that they could fire lots of workers, get their remaining employees who are terrified of losing their jobs to work like slaves, and pocket the savings. Voilà, pretty neat trick, eh? Say hello to the new lean and mean corporate American machine. And say goodbye to the American dream for all but the upper crust.

The current profit-reporting season is shaping up to be one of the best ever. For non-financial firms in the S&P 500, earnings per share are now higher than they have been for at least a decade. With over half of the companies in the S&P 500 having reported, profits in 2010 were up by 17% compared with 2009. (The year-on-year increase is far greater if financial firms are included, since they plunged in 2009 and then rebounded spectacularly.)

[...]

Some fear that the productivity improvements that have driven profit growth since the financial crisis will soon tail off. “Around 90% of the productivity growth in corporate America has come from cost-cutting, and that is now reaching its limit,” says Carsten Stendevad of Citigroup’s corporate-advisory arm. Scared for their jobs during the crisis, employees toiled more for no more money; but they cannot be whipped much harder.

[...]

Others disagree. “There is a lot more juice to be squeezed out of the lemon,” insists Hal Sirkin of BCG, a consultancy. Firms brag about having introduced “lean systems”, but most have done only “10-25% of what they could do”, says Mr Sirkin.

[...]

If, for some reason, [American companies] should fail to put their cash mountains to work, investors will demand the cash back through dividends and share buybacks. Indeed, many are already demanding, and receiving, just that. In short, as American firms expand at home and abroad, profits are set to rise and cash holdings to fall. Whether this will help the more than 9% of the American workforce who are unemployed remains to be seen.

[The Economist]