STRONG SECOND QUARTER CORPORATE EARNINGS--NOW WHERE ARE THE JOBS?

by Bill Breakstone, Somers, NY, July 23, 2010

A new Gallup poll was released on July 21st showing the confidence levels of the American public towards various institutions. The military ranked the highest at an approximate 79% approval rating. The Congress earned the lowest level of confidence, at 11%. Next to last was big business, at 13%.

The lack of confidence in the Congress is readily understandable. It is nearly impossible to get any meaningful legislation through, especially in the Senate. Likewise, the mistrust in business, after the near economic catastrophe, is also easy to understand.

We are now in the thick of the earnings season, and the reports coming out from the S&P 100 corporations thus far have been mostly brilliant. The New York Times today reports that “More than 140 companies have now reported results for the second quarter, and, by and large, the news has been good. On average, profits have increased by about a third.” Amazon’s profit rose by 45%; the New York Times Company second quarter profit more than doubled as it posted its first gain in three years; Apple has almost doubled its revenue in the last two years; Microsoft’s revenue total of $16.04 billion surpassed the $15.27 billion predicted by analysts, posting a 48 percent rise in net income; United Parcel Service said its second quarter net income increased 90 percent; the 3M Company said its quarterly net income rose 43 percent; Eaton Corporation reported quarterly net income of $226 million versus $29 million in 2009; AutoNation posted a 29 percent increase in second quarter net income; AT&T’s earnings rose 26%; and Ford easily beat profit and revenue expectations.

All this is wonderful news, no? So why are Americans so lacking in confidence when it comes to big business? The answer is that despite the improved picture in corporate revenue and earnings, unemployment remains unacceptably high. The official rate now stands at 9.5%, but the real rate is closer to 17%. Thus, American corporations are rebounding nicely, yet they are not adding jobs, even though inventory has been drawn down. Business is doing more with less. Instead of increasing their work forces, they are having employees work longer hours, great for those with a job, but terrible for those seeking employment. Add to that the growing outsourcing of work, and you end up with a stagnant labor market.

No one seems to have an answer to this dilemma. One would think that if business keeps improving, sooner or later jobs will be added. However, the drag of the housing market, which has now entered a “double-dip” of its own and is a main driver of the economy, does not bode well for the labor market. Nor does the general slowdown in auto sales, now that the incentives have run their course.

I guess we can only keep our fingers crossed and abide by the advice given yesterday by Fed Chair Bernanke—keep the stimulus in place until the economy recovers further and significant jobs are added and unemployment declines to a more manageable level.