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Stimulated but unemployed in the USA=Updated 6 hours 45 minutes agoWhile US unemployment remains stuck at 9.6 per cent
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Date Posted: 13/10/10 19:58:47
Stimulated but unemployed in the USA
By Michael Janda
Updated 6 hours 45 minutes ago
While US domestic profits have increased since the 2008 financial crisis, income to everyone else in America has fallen. (Getty Images: Thinkstock)
US corporations have been relative winners out of the financial crisis so far, but a leading share analyst is warning that cannot continue.
"American companies winners?" you ask incredulously. "Didn't many go bust or have to be bailed out?"
Of course you're right, but the key term is relative winners.
While US unemployment remains stuck at 9.6 per cent (with the real unemployment and underemployment rates much higher), American corporate profits bounced back from the 2008 collapse.
According to figures compiled by Morgan Stanley's global strategist Gerard Minack in one of his notes to clients, US domestic profits increased by $US420 billion in 2009, while income to everyone else in the United States fell by $US377 billion.
He says this was part of the 'Great Swap', where the US government stepped in not only to take bad debts off the balance sheets of many US financial institutions, but also provided stimulus payments that propped up household income and consumer demand despite continued falls in employment and working hours.
Mr Minack says this benefited businesses because it allowed them to cut their domestic labour costs without having to wear the usual feedback response of their retrenched and underemployed workers cutting spending.
In this sense, stimulus worked exactly as Keynes' General Theory says it should - with the public sector (directly and through households) propping up demand for goods and services in place of flagging private demand.
But what Gerard Minack is arguing is that the US corporate sector has not been playing ball in this stimulus strategy.
Rather than keeping more workers on as the Treasury's money filtered through to its collective coffers, the US corporate sector continued cutting working hours right up to December last year.
After rising from lows below 4.5 per cent before the crisis to a peak of just over 10 per cent, the United States's official unemployment rate has only eased to 9.6 per cent - and it has been stuck in the mid-to-high 9 per cent range for the whole of this year.
This labour-related cost cutting has been among the largest factors pushing up corporate profits, but it is unsustainable, and Gerard Minack says it probably has already made the surge in US corporate profits unsustainable as well.
That is because the government has exhausted most of its handouts, and is not in a budgetary position to launch a new round of stimulus spending - especially in the face of renewed financial market pressure for austerity measures to reduce budget deficits.
Now it is up to the business sector in America to start playing ball and employing more staff.
Mr Minack says that will reduce their profit margins, as some of the costs they cut come back into the business, making profit growth much harder to achieve than it was immediately post-crisis.
However, an even worse scenario is one where businesses do not pull their weight by starting to re-employ.
While that will be good for the profit margins of each individual business in the short run, in the longer term it will mean households have less money to spend.
That will result in less money going into the tills of businesses, which means lower revenues that could outweigh the higher margins.
In turn, that might mean renewed layoffs, thus plunging the US in the downward spiral that government stimulus averted in the first place.
Except this time the government won't have much more fiscal ammunition to break the spiral into a double-dip recession, or to help reduce the severity and duration of this potential future downturn.
Gerard Minack puts this catch-22 for American corporate profits succinctly:
"If corporate America doesn't start to hire, profits will suffer in a double-dip. If they do hire - the base case - tepid recovery continues, but margin improvement will be much less substantial than last year," he wrote in his note.
"This, in my view, points to current earning forecasts being too high under almost any scenario. In a more-of-the-same growth scenario, too high; in a double-dip scenario, far too high."
If Gerard Minack is right (and he was one of the few with an inkling of the impending financial crisis before it broke) and US companies miss analyst expectations with their future earnings, there will be further share market volatility ahead.
Sitting here in the 'lucky country', it's easy to imagine the crisis has passed, or never existed at all, but there are a range of hazards ahead as the global economy still needs to undergo its biggest restructuring since World War II.
Michael Janda is the ABC's online business reporter
Tags: business-economics-and-finance, company-news, corporate-governance, community-and-society, unemployment, event, international-financial-crisis, united-states
First posted 6 hours 50 minutes ago
Comments (12)
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BLZBob:
14 Oct 2010 8:26:54am
The best way to stimulate an economy is to give to those at the bottom, and watch it peculate up to the top.
If you just give it to those at the top, they won't even need those at the bottom in the equation.
Of course you need to take some from the top to give to those at the bottom in the first place.
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Mike:
14 Oct 2010 11:08:47am
Not true. If you give $1 in handouts to those at the bottom, it stimulates the economy to the tune of $1.01.
If you spend $1 on productive economic infrastructure such as power, water, telecommunications, rail or ports (but NOT roads!) it stimulates the economy to the tune of $2.40.
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granny:
14 Oct 2010 8:54:31am
The snake oil salesmen of Wall St are at it again - doling out $144 billion in bonuses. The TARP funding was supposed to be used to provide finances needed by small businesses, instead the money was used to merge or buy out opposition companies. How many jobs do the bankers of Wall St provide? I find it incredible that they see fit to reward just a few, while so many have so little left. The US will end up a 3rd world nation and the banksters will move on to another country.
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virgil:
14 Oct 2010 9:56:43am
More & more economists are saying the US economy is in deep deep dudu - locked into a downward spiral that will tell us much about the endgame of unregulated capitalism & the growth at all costs mentality. The big question is, how will it affect Australia when China "buys" the USA?
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Daniel:
14 Oct 2010 10:23:24am
China can't buy the USA. Local laws won't allow china to buy land or companies in the US.
So China is left with an increasing big pile of US Dollars and little to spend them on by junk US Treasury bonds.
So they buy anything and everything off anyone foolish enough to take their dollars.
And Australia is selling land, resources, companies, infrastructure, water rights, and more as fast as possible.
So soon we will have to pay profits and fees and rent to China (and other countries) to use our land, water, and rail, which ultimately has to be paid in Dollars which we can only get from our agricultural exports and by selling off even more assets. A spiral which ends with us waking up and changing or finding we own nothing of our country.
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TrevorN:
14 Oct 2010 10:31:11am
The USA financial markets have never accepted that they were responsible for the GFC or even that they had anyting to do with it. They have led the politcial and media fight against any form of regulation by President Obama or the Democrats.
They have learned nothing from the GFC. They have ripped off their government by pocketing the bailout funds and have abused the American public with the highly suspect and potentially illegal foreclosure methods in the housing markets and are continuing to paythemselves unrealistic bonuses.
Becase they have leared nothing and have not changed their ways the USA and potentially the whole world is in imminent danger of being plunged into a full blown disasterous recession that could last for a decade or more, because world governments will not have the money or the will to pursue futher bailouts.
We citizens have paid the ultimate price for their arrogance and their greed with or jobs, our homes, our retirement savings and our future prosperity and security and we will simply not allow our governments to make us pay more to prop up this immoral, greedy and degenerate bunch any longer.
This will be a word view. If world govenments are worried about the social unrest caused by their response to the GFC spreading across europe they will be besides themselves if they see hitherto tolerant societies go on the warpath in pursuit of justice and a fair go.
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Stewie:
14 Oct 2010 10:34:53am
My wife and I have been preapproved for a $300 000 loan to build on the Sunshine Coast. That'll build us a resonable house on our acre we already own. I looked realestate online for what we could purchase for the same overall investment in the US state of Texas - 1 hour out of Houston.. we could live like royalty!!
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Heath:
14 Oct 2010 10:37:29am
This is a classic example of private industry actually working against the public/national interest.
All those who support the idea that private industry is the most 'moral', efficient method of social and economic development take note. Of course I suspect this doesn't matter if you're the one raking in all the cash.
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Hubert:
14 Oct 2010 10:41:03am
God bless America...
Who would have suspected that Corporations would put short term profits ahead of the greater good?
The only way to fix problems like this is to regulate.
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Selling the worth ethic:
14 Oct 2010 10:47:53am
Lordy...why anyone would find this lack of "ball playing" by corporations surprising? Short term gain is all they are interested in. Slavery would make a come back if they could wangle it...but wait a minute, wage slavery is already experienced by millions and is cheaper!
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Paradise:
14 Oct 2010 10:52:47am
USA money manipulators are amongst the nastiest in the world. Life for so many is not about society, family, health, internal harmony, religion, spirituality or positive participation. It is about acquisition, accumulation, cornering, deals, the ME, not the you or us of life. Only powerful, strict regulation will help. That seems impossible in America's culture. Selfishness and greed beat generosity and need every time. But, you can't be anyone in America unless you have money It buys show partners, fake teeth and tits, as many marriages and houses and stocks and bonds as you need, and a hedge against the mass who really are not your type.
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stj911:
14 Oct 2010 11:33:07am
You think they are stupid, we pay our entire wages into the Banks only to be charged ATM/Banking fees while they invest in the overnight futures exchange,loan out billions as they hold onto your minimum balances etc. This along with Super (where we get a benefit when the market doesn't spiral down into a corrupt cesspool) gives the financial sector the greatest DOLE payment known to mankind with very little in the way of protection for customers and a spineless government which does little to be a watchdog or to temper the rip off that is the Home Mortgage.
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