Sunday Times (London)
April 25, 2010
by Irwin Stelzer
There are two ways to look at the profit reports that are emerging from company boardrooms, often after a brief stop for a shine at the offices of the firms’ accountants. One is to find out just how this or that firm has been doing in the past quarter, compared with a year ago and with analysts’ expectations. I leave that to stock-market analysts, whose job it is to move from that information to a guess as to what it portends for the future, and from there to a “buy”, “sell”, or “hold” recommendation. With some 80% of companies thus far reporting figures that exceed analysts’ (modest) expectations, and their earnings increasing by 40% compared with last year, there is plenty of cheer.
Another way to look at these earnings reports is to tease out a few generalisations about the longer-term outlook for the American economy.
The first conclusion is that the American consumer is a resilient beast. Not a wild one: consumer credit has declined in 12 of the past 13 months, and the amount outstanding is $100 billion less than it was last year. But American consumers are willing to spend on innovations — products that were unknown only a few years ago. It is a long time since John Maynard Keynes predicted that human wants would be more or less satisfied, and that leisure would become the dominant fact of life in most advanced economies. The second world war intervened on this road to the easy life, but the idea was picked up after the war by the secular stagnationists, who were convinced that since most families already had a radio, and many owned a car, consumers were sated, and economic growth would be difficult to sustain.
It is difficult to determine just how much weight to attach to the spurt in consumer spending last month. For one thing, the large percentage increases were from a recession-depressed base in March of 2008: in many cases sales still lag those in 2007. For another, Easter fell a month earlier this year, driving into March sales that were made in April last year. And consumers are still worried about their jobs and many are struggling to meet their mortgage payments and rebuild their retirement accounts. Finally, one month is not a trend.
Still, recent earnings reports tell us the direction future spending is likely to take. Consumers love innovative products. Apple’s earnings were so robust — up 90% in the second quarter — that analysts scrambled to raise their estimates of the levels the shares will reach. In part this was due to the 124% increase in sales of the iconic iPhone and related products, in part to the growth of the rest of the Apple line of computers: unit sales of desktop computers rose 40% over last year’s level, and sales of portable MacBooks jumped 28%, propelled in part by the aura of innovation that now casts its glow over Apple’s entire product line. Sales of the new iPad won’t contribute to earnings until the current quarter, but indications are that Steve Jobs, Apple’s chief executive, is on to another winner, sales being so high that the American market sopped up all available supplies, forcing a postponement of the introduction of the device in Europe. So much for the theory of the sated consumer.
Jobs is promising “several more extraordinary products” this year. Meanwhile, staid old Nokia is struggling to persuade consumers that its suddenly old-fashioned gadgets are worth having. Those pundits who are guessing that 3D television will prove a bust may be under-estimating consumers’ willingness to open their wallets for the new, the usefully innovative, the daring.
There is another important clue about the American economy buried in these glowing figures from Apple. Growth in sales of the iPhone was driven in good part by overseas sales. Which tells something else about the American economy, and something that comes as a bit of a surprise given all the tales of woe that are emitted from Congress after each release of trade data. High-technology American firms are proving that they can make sales and money overseas.
Intel, which also reported a larger-than-expected increase in earnings, gets 82% of its revenues from international markets, IBM and Hewlett-Packard 64%, Oracle, Apple and Cisco more than half. This suggests that firms that have the products and skills to tap international markets are likely to contribute to a sustained economic recovery. But a lot of what they sell they make outside the US, which suggests that the profits recovery will have to go a long way before it creates a domestic jobs recovery.
The profit figures also tell us that consumers will spend on convenience and bargains, and that competition is their friend. Amazon’s first-quarter earnings topped last year’s by 68%: it is, after all, a marketer that keeps in touch with its customers and provides a wide range of goods at fair prices, delivered to your door. But its share price fell on the news, because analysts know that the arrival of the iPad means the day of the Kindle’s virtual monopoly is coming to an end, giving consumers choice and the upper hand.
Finally, the earnings figures give us a clue as to what has been going on in the shops and offices, and on the factory floors of America. Improved earnings have come more from cost cutting than from higher sales. In the last three quarters of 2009 productivity — output per man-hour — increased at the phenomenal annual rate of 7%-8%. Bad news for job seekers, good news for the long-term competitiveness of America.
All this good cheer shouldn’t obscure a few very unpleasant facts. The American economy is on steroids. The Fed is printing money, and the government is running large, stimulative but unsustainable deficits. Consumers have yet to be hit with the tax increases the Obama administration has in mind for them. Companies are taking large write-offs to reflect the increase in costs imposed on them by the healthcare “reform”, and Obama is determined to pass an energy bill that will raise energy costs, putting a crimp in consumers' ability to spend on other things.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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