Sunday, May 10, 2009

Recovery optimism positive signs getting ahead of themselves

Is company cost-cutting company throat-slitting? 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."

Getting a slice of the mexican business cakeAnalysts 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?"

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