Industries Find Surging Profits in Deeper Cuts

The trend has analysts smiling, though the disconnect among consumers is sharp, where high unemployment continues unabated.

July 27, 2010

NEW YORK - Despite falling motorcycle sales that continues a three-year dip without any expectation of an imminent turnaround, Harley-Davidson is posting huge profits, a result of massive cost-cutting, the New York Times reports. And it??s a scenario playing out with many large companies.

For Harley, its second quarter $71 million profit, more than triple its earnings of three years ago, has boosted the mood of analysts, a sharp disconnect from the collective pain shared by consumers, who continue to suffer from high unemployment.

As companies turn to cost cutting to sustain profits, the "benefits" are realized mainly by shareholders instead of the broader economy, as management carefully saves cash rather than increasing hiring and production. Harley, for example, will cut up to 1,600 jobs by year's end, which follows a cut of 2,000 jobs last year, or one-fifth of the company's entire work force.

The Times said that many other companies reported gains for the second quarter despite slowing sales (General Electric, Hasbro, JPMorgan Chase), with healthy profits that have helped buoy the stock market, though "the source of those gains raises deep questions about the sustainability of the growth, as well as the fate of more than 14 million unemployed workers hoping to rejoin the work force as the economy recovers."

While the ability to increase profits despite declining sales is a competitive advantage for U.S. firms, analysts are concerned that companies are not reinvesting those earnings.

"As long as corporations are reinvesting, the economy can grow," said Ethan Harris, chief economist at Bank of America Merrill Lynch. "But if they??re taking those profits and saving them, rather than buying new equipment, it hurts overall growth. The longer this goes on, the more you worry about income being diverted to a sector that??s not spending."
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