The economist writes, Most American companies have enjoyed several years of bumper profits. But, as the results season gets under way, some big firms are reporting that times are getting tougher. Excerpts with edits and comments added:
By most measures American companies are having it easy. The country’s economy is growing at a healthy pace — around 4% a year—and consumer spending is holding up. Although the interest rates are moving up and set to increase further, borrowing is still cheap. And a weak dollar makes America’s exports all the more alluring to buyers abroad, who currently account for almost a quarter of American firms’ profits. No wonder, then, that American companies' profits as a share of GDP are close to an all-time record, or that the Dow Jones Industrial Average hovers around 10,500, over 40% higher than where it stood in late 2002.
Some firms business is less bright. – eBay, Qualcomm, Motorola, Continental, Delta Airlines, General Motors, etc. These point to a wider truth: the days of vast and ever-growing profits may be coming to an end for the time being. The specific travails of individual companies offer only a partial explanation for the slew of disappointing earnings news in recent days. More generally, the high oil price has hit profits and may also contribute to slowing economic growth and hence further depress earnings. Other corporate costs have also escalated. For example, America’s car companies have had to endure big rises in steel prices.
However, another factor lies behind the slowing growth of profits: productivity growth. Between 1995 and 2000 output per man hour grew by around 2.5% a year; between 2001 and 2003 it jumped to 4.2%. The cause of this sudden burst lies in the reaction of firms in the aftermath of the bursting of the technology bubble and subsequent recession. As the recession hit, firms shed labour. As the economy recovered, slimmed-down companies squeezed more out of workers who responded favourably while labour markets remained slack, boosting productivity. As a result, hiring stagnated, unit labour costs fell and profits rose, resulting in America’s much-discussed “jobless recovery”.The boom in technology spending during the bubble created a “backlog of unexploited capabilities”. It is generally accepted that a period of reorganisation is required to exploit fully the benefits of new technology. The round of corporate cutbacks in the recession afforded just such an opportunity for workers to make the most of new technology.The problem that faces America’s companies is that productivity growth of 4% is unsustainable. The measure slumped to 1.8% at an annualised rate in the third quarter of 2004 and could continue. US corporations have accrued more than their fair share of the fruits of a growing economy, by extracting extra productivity from their employees over the past three years, and that a period of rebalance between profits and wages (and jobs) is due.
My Take: The Hidden hand of technology is in a way contributing to lower profits - there is a timelag for enteprises to begin to realise the returns on new technology investments - for sometime, fresh investments were put on hold and now, there are broad indications that technology spending is improving and before too long hopefully this may begin to provide benefits - either way - the consumer on the whole shall benefit significantly and technology shall once again begin to be revered- as results begin to show up- till then the likes of Nicholas Carr shall begin to deride technology. The impact of technology shall be felt a lot more with good progress in deployments in areas likeRFID, Grid Computing etc..