Is company cost-cutting company throat-slitting?

By James B. Kelleher and Jennifer Ablan - Analysis

CHICAGO/NEW YORK (Reuters) - In recent weeks, a number of investors and economists have declared the recession all but over based on a handful of seemingly positive signs, including a flurry of better-than-expected earnings from U.S. companies.

They may be getting ahead of themselves.

Aggressive cost-cutting through layoffs and capital expenditure reductions has, it's true, helped many companies report profits that surpassed analysts' estimates.

But beneath what can be perceived as "green shoots" of recovery, experts say, lie the germinating seeds of what could be a much deeper, more prolonged recession.

"I think the clear and present danger is the negative feedback loop for the economy," said Greg Peters, head of global-fixed income and economic research at Morgan Stanley in New York.

"If people are getting laid off and if capital expenditures are being pulled back, then that has a cascading effect that is much more long-lasting on the economy."

Analysts and investors argue that while job, capex and R&D cuts may shore up individual profits temporarily, they are bad news in the aggregate. They swell the ranks of the unemployed, reduce the wages of those who keep their jobs, and hurt an already struggling economy by further crimping consumer and corporate spending.

And that will only ricochet back on the companies themselves, reducing demand for their products and services and putting additional pressure on their sales and margins.

"As corporations cut payrolls and deleverage they are acting perfectly rationally," said Robert Reich, the former U.S. Labor Secretary under President Bill Clinton who now teaches at the University of California, Berkeley.

"But if that's what every corporation does, we're going to end up with far more job losses and in a deeper economic hole. Who's going to be left to buy all the goods and services these companies produce?"

THE BEAT GOES ON ... JOB LOSSES TOO

The list of U.S. companies able to report better-than-expected results for the most recent quarter because aggressive cost cuts offset falling sales is a long one.

It includes appliance maker Whirlpool Corp, advertising powerhouse Omnicom Group Inc, specialty glass maker Corning Inc, wireless telephone service provider Sprint Nextel Corp, drug maker Pfizer Inc tool maker Black & Decker Corp, and Kraft Foods Inc.

Based on the number of earnings that beat forecasts, one would never guess the United States is in the midst of the worst economic downturn since the Great Depression. According to Thomson Reuters Director's Report of the 365 S&P 500 companies that have reported earnings so far this quarter, 65 percent delivered better-than-expected results.

"In the aggregate, companies are reporting earnings that are 10.4 percent above the estimates, which is above the 1.6 percent long-term average" based on figures since 1994, John Butters, director of U.S. earnings at Thomson Reuters, wrote in his "This Week in Earnings" report last Friday.