After Cashing In on Job Cuts, Wall St. Looks to Worker Upturn

Wall Street is hopeful that American companies, after years of gaining ground at the expense of their employees, will start to succeed because of the rising fortune of those workers.

Less than a week since the Dow Jones industrial average hit its all-time high, the broader Standard Poor’s 500-stock index is on track to surpass its own 2007 high. The reason, in no small part, is because of investor confidence in the growing economic strength of American households.

This is a shift from the last few years, when stocks and corporate profits soared primarily because of cost-cutting and increased productivity from a shrinking or slow-growing work force. The Federal Reserve’s stimulus programs helped corporate America, but they did little to help improve the lives of most American workers, whose wages declined while unemployment remained stuck at high levels.

A surprisingly good employment report on Friday was the strongest of a number of recent indicators that the benefits of the Fed’s program are now starting to trickle down to ordinary Americans, who should, in turn, push up sales at American companies. In addition to brisk job growth in recent months, the February employment report gave some of the first evidence of a sustained upturn in wages, and showed that it was spread across many industries.

The improving job market could falter, particularly if cutbacks in government spending mandated by the so-called sequester take a substantial bite out of economic growth. But even a more modest upturn comes not a moment too soon for American companies.

Growth in corporate profits has slowed in recent quarters as the earlier gains from productivity and cost-cutting reached their limits. Many strategists are now seeing signs that the slowdown in expense reduction — the so-called bottom line — is being made up for by top-line growth in revenues from reviving American consumers.

“You can only cut and cut and cut for so long, eventually you have to have growth,” said Paul Hickey, a founder of the Bespoke Investment Group. “Now we’re starting to see some signs that is happening.”

In the fourth quarter, American companies experienced the biggest increase in sales per share of any quarter since the financial crisis, according to figures from RBS Securities. In announcing their most recent financial results, many executives spoke about the boost they have gotten from American customers, and the money they are putting back into the pockets of their own employees.

Daniel S. Fulton, the chief executive of Weyerhaeuser Company, a timber company, told investors in January, “Most of the hiring that we have done in the company has been production employees that we’ve been putting back to work, in order to be able to ramp up and respond to the increased opportunities for wood products.” The improving prospects for corporate revenues are encouragement to hesitant investors who have been wondering whether to get back into the stock market but worried that the current rally could already be reaching its peak. After six straight days of gains, the S. P. 500 closed Friday just 14 points, or 0.9 percent, from the record high of 1,565.15 it hit in October 2007. Factoring in inflation, however, the index is still far from earlier peaks, as is the Dow.

The sequestration’s automatic spending cuts have not yet appeared in economic data and there are fears it could exert a future drag on the economic recovery. But Friday’s employment report — showing a gain of 236,000 jobs and a dip in the jobless rate to 7.7 percent — suggested that American businesses have largely shrugged off the 2 percentage point increase in the payroll tax that was expected to inflict more pain.

Even if corporate revenues climb further, it won’t necessarily lead to rising share prices. Investors have already factored the optimistic economic signs while making their investments. What’s more, skeptical strategists say there are significant threats ahead for both consumers and corporations. The basic fear in trading circles is that the economic recovery will not be able to survive the Fed’s ending its bond-buying programs. When the Fed does step back from its support for the market, it is expected to send up interest rates, which could dampen lending and the housing market.

Article source: http://www.nytimes.com/2013/03/11/business/economy/after-corporate-upswing-hopes-grow-for-a-consumer-revival.html?partner=rss&emc=rss