Private-sector austerity

This trend has been evident since the recession in 2008-2009 when companies in the face of collapsing consumer demand resorted to aggressive cost compression to weather the economic storm.

The result has been a big gain in productivity levels across many industries.

In the face of continuing slow consumer demand, profits have rebounded because of the productivity gains, primarily from using less people to produce each unit of output. This is illustrated in the data from the Census Bureau showing that in the second quarter of 2011, while sales by the US manufacturing sector went up by only 2.4 per cent, after-tax profit jumped by nearly 10 per cent.

When the comparison is made with the second quarter of 2010, the picture is even more glaring with sales going up by 14 per cent, while after-tax profits shot up by 42.5 per cent. It is important to note as well that after-tax profits in that quarter totalled roughly US$160 billion, taking it well above the pre-recession level of US$132 billion in the corresponding quarter of 2007.

The performance of the non-durable goods segment of the manufacturing sector that includes petroleum and coal products, beverage and tobacco, and basic chemicals and synthetics, was even stronger.

After-tax profits for these industries in the second quarter of 2011 went up by nearly 11 per cent and 71 per cent, compared with results for second-quarter 2011 and first-quarter 2010, respectively, far outstripping the growth in sales.

Nonetheless, it should be recognised that rising petroleum prices contributed significantly to the skyrocketing after-tax profits and near 20 per cent increase in sales of industries producing non-durable goods.

Durable goods-producing industries which include computer equipment and other electronic products, motor vehicles and parts, aerospace products and metal products, reported significantly lower sales growth and after-profit tax increases.

Sales growth was 7.5 per cent for the second quarter of 2011 compared with the similar period of 2010, but was flat when matched against the previous quarter of 2011. After-tax profits, though, improved substantially by 8.6 and 19 per cent when compared with first-quarter 2011 and second-quarter 2010.

Unemployment still high

A look at the labour market statistics reveals that at the height of the recession unemployment had risen to 10.1 per cent in October 2010, coming from 4.4 per cent in May 2007, more than a doubling of the rate. But even as manufacturing sales have increased, and after-tax profits have risen beyond pre-recession levels, the unemployment rate in second-quarter 2011 still stood at 9.1 per cent.

In fact, it has risen from 8.8 per cent in March of this year, which was the lowest point since March 2009.

Since consumer spending accounts for more than two-thirds of American GDP and the rate of unemployment is a big factor influencing consumer spending, it is logical that further growth in manufacturing sales will be constrained should the unemployment rate remain high.

In other words, continued compression of costs through reductions in the labour force is likely to retard manufacturing sales and eventually undermine profits.

Indeed, the consensus among economists is that the slowdown in the US economy is largely explained by the lack of consumer demand, which itself is partly the outcome of these contradictory forces - an inherent feature of capitalism.

business@gleanerjm.com