Trouble Ahead-Big Company Profits and Declining Employment

Over the past two decades we’ve had growing trends toward globalization and technology. The stock market crash of 2008-09 and the ensuing unemployment exacerbated and accelerated these mega changes. Profits are down.

Companies were forced to slim down, to lay off workers and find ways to survive, yet keep revenue and profits on an uptrend. Many of the 100 largest firms took drastic steps in this direction.

Verizon (VZ.N) embarked on a program to reshape its operations. It slashed employment at call centers and focused on wireless technology. As a result its workforce shrank by 30%. Operating profit more than doubled during this changeover. (Reuters.com)

Another example is Apple (AAPL) Apple’s workforce grew eightfold in the past 12 years. However, their Taiwan based Foxconn Technology Group’s employment grew by an astounding one million in the same period.

With the growing use of technology we now have a great divide between pay scales at the managerial level and lower paid workers. The Bureau of Labor Statistics (BLS) reported that a small group of managers and technology people’s wages rose by 28% between 2001-13, while lower paid employees’ wages fell by 5.5%.

The US Federal reserve sees these trends as trouble spots in our economy. What we have is growing production and services with rising revenues and profits coupled with declining wages for lower paid workers. What this means is that we have created a “great divide” between the managerial group and the workers at the lower end of the scale. It is having the effect of gutting the middle class. What is so troubling is that the middle class is losing its purchasing power to buy the goods and services that big companies are offering. Atlanta Federal Reserve President, Dennis Lockhart said: “We have to understand what structurally is going on…Is the country really changing in a fundamental way?” This perhaps explains why Chairperson, Janet Yellen, is so concerned with employment trends in our economy. What really has happened is that the crash of 2008-09 has created a vast segment of workers who have been displaced and are unable to find good paying jobs. Some are still unemployed, some had to take lower paying jobs, or part time jobs to survive. These people are simply buying the basics of food, clothing and shelter.

What this also means is that we can no longer rely on our large firms to pick up the slack in unemployment as was done in previous recessions.

These confusing trends are giving analysts a new paradigm to grapple with. We now hear the term “New Normal” to help explain what is going on. Company profits are rising along with stock prices hitting new all time highs.

For investors, the key question is: “How long can these divergent trends continue?” “Are stock prices getting ahead to the real day to day economy?” Historically, stock prices do not always follow the economy in lock step. We could see stock prices continue to rise because they offer the greatest return on investment. We are also seeing foreign money coming into the market from war torn countries like Ukraine and Russia and even some European countries that fear the collapse of the Euro.

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