Companies boost profit, productivity by cutting
Companies boosted their workers’ productivity and their own profits in the spring mainly by slashing costs and capping their employees’ pay.
That was clear from revised government figures released Wednesday that provided further evidence that a tentative recovery has begun, while also reinforcing nagging concerns. Analysts worry the tight job market and lack of wage growth will depress incomes, limit further corporate profitability and forestall a pickup in all-important consumer spending.
Bill Schultz, chief investment officer at McQueen, Ball & Associates in Bethlehem, Pa., said companies that have shed workers and squeezed out savings won’t be able to show the big profit gains they did last quarter by relying on more big cuts. Having already made deep reductions, companies will need to find ways to generate more revenue.
"Profits have recovered nicely, but it’s more the way that they have recovered that gives people pause," he said. "The key is to somehow blend this cost-cutting with revenue growth."
Productivity — the amount of output per hour of work — rose at an annual rate of 6.6 percent in the April-June quarter. That’s the largest advance since the summer of 2003 and slightly better than the 6.4 percent increase the government estimated last month.
At the same time, labor costs fell at an annual rate of 5.9 percent — the sharpest drop since 2000 and slightly more than the estimated 5.8 percent drop.
Economists don’t expect productivity to keep surging. But they said the productivity jump in the second quarter, combined with falling labor costs, might persuade employers to slow the pace of layoffs and eventually resume hiring.
That is critical because until the labor market heals, consumers won’t step up spending. And consumer spending, which accounts for about 70 percent of economic activity, is vital for any sustained rebound.