May 25, 2009 / 7:28 PM / 10 years ago

Falling profits mean more job loss

WASHINGTON (Reuters) - In the world of corporate profits, much like the broader economy, less bad is good these days. Unfortunately, it’s not good enough to stem the rise in unemployment.

A man looks for jobs on a computer at the Economic Development Department in San Francisco, California April 17, 2009. REUTERS/Robert Galbraith

Two-thirds of the companies in the U.S. Standard & Poor’s 500 index reported first-quarter profits that exceeded analysts’ expectations, according to Thomson Reuters data, which is one reason why the S&P 500 stock index has rallied more than 30 percent from an early March trough.

However, the actual earnings results were down nearly 36 percent from a year earlier, and the United States lost a net 2.1 million jobs over those three months.

It is a reflection of what is happening in the broader economy. Readings on manufacturing and consumer spending show the U.S. economy is unraveling more slowly than it was just a couple of months ago, although true recovery has yet to begin.

Credit markets, which have been under severe strain since the bankruptcy of Lehman Brothers in September, are also showing signs of improvement. Barclays Capital economist Ethan Harris described the current market mood as “moving from ‘nuclear’ to ‘Canadian’ winter.”

There were also fewer job losses in April than in March. But until corporate profits turn around, companies will not be doing much hiring, and unemployment will probably keep climbing well after the recession officially ends.

Indeed, after the 2001 downturn, it was another 19 months before unemployment finally peaked.

Figures due on Friday are expected to show U.S. corporate profits after taxes fell at a 7 percent rate in the first quarter, which would be an ugly reading but not as bad as the fourth quarter’s 10.7 percent drop — the worst since 1994.

The data will be included in the government’s revised look at first-quarter gross domestic product, which economists expect to show that the economy contracted at a slower rate than originally thought. That would bolster the view that the recession is gradually loosening its grip on the economy, but it won’t improve the job market outlook.

Joseph Brusuelas, an economist at Moody’s in West Chester, Pennsylvania, said it may be 2013 or 2014 before U.S. unemployment recedes to a pre-crisis level of around 5.5 percent. The jobless rate hit 8.9 percent in April, and some economists think it could eventually exceed 10 percent.


The United States isn’t alone in losing jobs. Japan releases unemployment data on Thursday, and economists polled by Reuters think the jobless rate rose to 5 percent in April from 4.8 percent a month earlier.

Euro zone employment figures for April are scheduled for release on June 2, and economists expect the jobless rate to rise to 9.1 percent from 8.9 percent.

Unemployment normally rises during recessions. Brusuelas said what is different this time is that two key segments of the U.S. labor force, auto manufacturing and residential construction, will not bounce back when the economy recovers.

General Motors (GM.N) faces a government-imposed June 1 deadline to restructure or it may follow rival Chrysler into bankruptcy, as most analysts think likely. Even if it avoids bankruptcy, the job losses will be large because both companies are closing a number of manufacturing plants and dealerships.

“It’s not just the auto workers. It’s all the suppliers and everyone else,” Brusuelas said. “We think the multiplier is five. For every auto job that’s lost, there’s another five” people who could potentially lose their jobs as well.

That would include the loss of jobs directly related to auto manufacturing, such as parts suppliers, but also other jobs with a more indirect link, including staff at restaurants where auto sector employees ate, or even health care workers.

In residential construction, more than 300,000 jobs have been lost since the peak of the housing market in 2006, according to the U.S. Bureau of Labor Statistics. Some of those jobs may return once the housing market stabilizes, but probably not all of them.

Corporate earnings forecasts offer some clues about when the job market might begin to recover. According to Thomson Reuters data, earnings for the S&P 500 aren’t expected to show year-over-year improvement until the fourth quarter of 2009.

That is also when Northern Trust chief economist Paul Kasriel expects unemployment to peak. Kasriel thinks it will top out at 10.1 percent by December.

He sees cause for optimism in the fact that claims for unemployment benefits appear to have peaked in March, barring a spike in the coming weeks should GM file for bankruptcy.

“The message is that although an outright economic recovery still lies ahead, the worst of the recession is likely behind us,” Kasriel said.

Editing by Chizu Nomiyama

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