WASHINGTON (AP) — Strong second-quarter earnings from McDonald’s, General Electric and Caterpillar on Friday are just the latest proof that booming profits have allowed Corporate America to leave the Great Recession far behind.
But millions of ordinary Americans are stranded in a labor market that looks like it’s still in recession. Unemployment is stuck at 9.2 percent, two years into what economists call a recovery. Job growth has been slow and wages stagnant.
“I’ve never seen labor markets this weak in 35 years of research,” says Andrew Sum, director of the Center for Labor Market Studies at Northeastern University.
Wages and salaries accounted for just 1 percent of economic growth in the first 18 months after economists declared that the recession had ended in June 2009, according to Sum and other Northeastern researchers.
In the same period after the 2001 recession, wages and salaries accounted for 15 percent. They were 50 percent after the 1991-92 recession and 25 percent after the 1981-82 recession.
Corporate profits, by contrast, accounted for an unprecedented 88 percent of economic growth during those first 18 months. That’s compared with 53 percent after the 2001 recession, nothing after the 1991-92 recession and 28 percent after the 1981-82 recession.
What’s behind the disconnect between strong corporate profits and a weak labor market? Several factors:
– U.S. corporations are expanding overseas, not so much at home. McDonalds and Caterpillar said overseas sales growth outperformed the U.S. in the April-June quarter. U.S.-based multinational companies have been focused overseas for years: In the 2000s, they added 2.4 million jobs in foreign countries and cut 2.9 million jobs in the United States, according to the Commerce Department.
– Back in the U.S., companies are squeezing more productivity out of staffs thinned by layoffs during the Great Recession. They don’t need to hire. And they don’t need to be generous with pay raises; they know their employees have nowhere else to go.
– Companies remain reluctant to spend the $1.9 trillion in cash they’ve accumulated, especially in the United States, which would create jobs. They’re unconvinced that consumers are ready to spend again with the vigor they showed before the recession, and they are worried about uncertainty in U.S. government policies.
“Lack of clarity on a U.S. deficit-reduction plan, trade policy, regulation, much needed tax reform and the absence of a long-term plan to improve the country’s deteriorating infrastructure do not create an environment that provides our customers with the confidence to invest,” Caterpillar CEO Doug Oberhelman said.
Caterpillar said second-quarter earnings shot up 44 percent to $1 billion– though that still disappointed Wall Street. General Electric’s second-quarter earnings were up 21 percent to $3.8 billion. And McDonald’s quarterly earnings increased 15 percent to $1.4 billion.
Still, the U.S. economy is missing the engines that usually drive it out of a recession.
Carl Van Horn, director of the Center for Workforce Development at Rutgers University, says the housing market would normally revive in the early stages of an economic recovery, driving demand for building materials, furnishings and appliances — creating jobs. But that isn’t happening this time.
And policymakers in Washington have chosen to focus on cutting federal spending to reduce huge federal deficits instead of spending money on programs to create jobs: “If we want the recovery to strengthen, we can’t be doing that,” says Chad Stone, chief economist at the Center on Budget and Policy Priorities, a research group that focuses on how government programs affect the poor and middle class.
For now, corporations aren’t eager to hire or hand out decent raises until they see consumers spending again. And consumers, still paying down the debts they ran up before the recession, can’t spend freely until they’re comfortable with their paychecks and secure in their jobs.
Said Van Horn: “I don’t think there’s an easy way out.”
NEW YORK (AP) — Time is running out for Washington to raise the country’s borrowing limit and avoid a default. Wall Street isn’t panicking yet. But if the unthinkable happens, a default could strike financial markets like an earthquake.
“If we just get higher longer-term interest rates, we’d be lucky,” said John Briggs, Treasury strategist at the Royal Bank of Scotland.
What might markets look like after a default?
The tremors from even a short-lived default could take unpredictable paths. Stocks, bonds and the dollar would likely plummet in the immediate aftermath.
There’s wide agreement among economists that a default would drive up borrowing costs for everybody. U.S. Treasury yields act like a floor for other lending rates, so raising them makes it more expensive for Americans to take out mortgages, for corporations to finance new spending and for local governments to borrow.
But analysts say predicting exactly how a default would play out in stocks, bonds and currency in the hours and days following the Aug. 2. debt ceiling deadline is practically impossible.
“If I were to draw a flow chart, it becomes so complex it’s impossible to analyze the impact of a default,” said Guy LaBas, chief fixed income strategist at Janney Montgomery Scott.
When pressed, investors say the immediate aftermath could look like the financial crisis in September 2008. Stocks would lead the way down. In the month following Lehman Brothers’ bankruptcy, for instance, the Standard & Poor’s 500 index lost 28 percent.
Gold may offer some refuge. Fear has driven traders into precious metals in droves in recent years, but gold is at a record $1,594 an ounce, without taking inflation into account. But two places where traders usually hide — the dollar and U.S. Treasurys — are likely to sink as the world’s investors flee the U.S. There would be few places to hide.
A deeper fear is that a default could freeze the short-term lending markets that keep money moving throughout the global financial system. Treasurys and other government-backed debt are widely as used collateral for loans in these markets.
A default and a downgrade of U.S. debt by rating agencies would shake the trust in that collateral, Briggs said. Lenders could respond by demanding borrowers to post more collateral, forcing them to sell other investments to meet those demands. A similar selling cycle spread turmoil across markets when Lehman Brothers collapsed in 2008.
But the fallout from a U.S. default could be much worse.
“I don’t even want to think of the ripple effects,” Briggs said.
Indeed, most analysts agree that if the world’s largest economy reneges on its debts, the consequences would be catastrophic. That’s why so far they’ve trusted Congressional Republicans and President Barack Obama to reach a deal.
Federal Reserve Chairman Ben Bernanke certainly drew a dire picture in testimony before the Senate Banking Committee on Thursday. He said a default would be a “calamitous outcome” and “create a severe financial shock.” The global financial system relies on Treasurys, backed by the world’s largest economy and long considered one of the world’s safest bets.
“A default on those securities would throw the financial system potentially into chaos,” Bernanke said.
The widespread selloff that might trigger could have one benefit, Briggs and others say. Panic-selling might force Washington to quickly agree to raise the debt limit. Think back to September 2008 for some historical perspective. After the House of Representatives voted down the bailout bill to create the Troubled Asset Relief Program on Sept. 29, the Dow Jones industrial average nosedived 777 points. Congress made an about face and four days later passed the TARP bill. President George W. Bush quickly signed it into law.
“We’re setting up for a TARP-like moment,” said Neil Dutta, U.S. economist at Bank of America-Merrill Lynch. “The politicians don’t come to a resolution, but the market forces a resolution.”
Traders are still banking on a deal to increase the borrowing limit before the Aug. 2 deadline. That’s one reason stocks and bond yields have remained relatively stable thus far, even after Moody’s and Standard & Poor’s warned they may soon take away the country’s top credit rating.
“What would shock is if Washington failed to beat the deadline,” said Tony Crescenzi, market strategist at Pimco. Crescenzi and other investors believe the negotiations could drag on until the last minute.
Markets would likely greet a deal with a “relief rally,” analysts say. The effect would be the reverse of a default: Stocks, corporate bonds and the dollar all jump.
“The market will react well to it,” said David Kelly, chief market strategist at J.P. Morgan Funds. Kelly said a deal would lift the uncertainty hanging over investors, especially those too worried to buy stocks now. After President Bush signed the TARP into law in 2008, for instance, the Dow made large jumps, adding as many as 946 points in a week.
When Washington finally agrees to raise the debt ceiling, Treasurys could drop because investors would be more willing to take risks in other investments, Kelly said. That’s how they normally trade: Good economic news pushes Treasury prices down and yields up.
The relief may not last long. If the agreement leads to deep spending cuts, Wall Street economists say it will likely drag down economic growth. Similarly, in late 2008, the wild gains evaporated as the financial crisis took hold. The S&P bottomed out in March 2009.
Federal spending makes up 8 percent of gross domestic product, a broad measure of the economy. Goldman Sachs economists estimate that a deal to cut $2 trillion in spending could take 0.8 percentage points off economic growth next year. The bank already predicts modest real GDP growth of 3.1 percent in 2012. Knock off a quarter of that and the economy won’t look much better than it does now
Despite the recession, women business owners have managed to weather the storm better than their male counterparts, and have even started businesses at a higher rate, according to a new report.
A rise in technology, the educational attainment level of women, and diversification in job industries such as construction and waste services are also likely reasons for the growth in female representation in entrepreneurship, according to the report.
Women are also starting up home based businesses at a greater pace, which has many benefits and personal tax advantages.
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