High Unemployment May Help Corporate Earnings

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Corporate earnings are expected to be poor for the second quarter, perhaps the worst in three years, or the worst since the end of the recession. Each of these predictions has been made with conviction. However, the bottom line buffer for many companies may be ongoing layoffs or, at least, the unwillingness to add jobs.

While the economy added 195,000 jobs last month, the rate is nowhere near enough to replace jobs lost in the recession. Many targets for healthy unemployment put a signal of a full recovery at below 6%. Corporate job additions are not near a pace to bring the joblessness number down that far.

One of the most commonly used actions to keep labor costs down is to retain workers on a part-time basis. Bureau of Labor Statistics data for June showed that trend ongoing:

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) increased by 322,000 to 8.2 million in June. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

Companies that absolutely must have workers for productivity can get them at below the market costs that existed before the recession. There is no end in sight for that practice. As a matter of fact, it seems to work very well.

The theory about why many U.S. companies had poor revenue in the second quarter is that some lost both sales and profits in Europe. For the most part, it is harder to fire people there, at least with economic efficiency, due to labor laws in Europe. Those same sort of restrictions usually are not present in the United States, which makes it easier to drop employment costs here.

Slow sales should be profits that are devoured by expenses. Expenses at many companies are dominated by people. That means salvaging second-quarter earnings may have been as simple as keeping workforce numbers low, or even paring them.

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