Economists love history and statistics. In past recessions, when productivity reached a certain level, prosperity was just around the corner. But what if a recession is ahistorical, like this one? What if it has no precedent?
Don't accept statistics on faith. In the face of rising unemployment and foreclosure rates, what accounts for these profits?
If you weren't sure of the utter falsehood that what's good for Wall Street is good for Main Street, all you need to do is look at the worker productivity numbers for 2 Q '09. Productivity is the measure of what the economy produces per worker hour. And productivity at the end of June was the highest it's been since 3 Q '03, an annualized pace of 5.5%.
The profits didn't come from producing more stuff that more people wanted to buy. It came from merciless cost-cutting. Instead of 3 people doing the work of 3, 1 person does the work of 3. Easy math. Productivity zooms upward by 300%.
As reported in the WSJ:
The net result: rising unemployment, stagnant wages, sagging consumer confidence--and better than expected corporate profits.
Higher earnings and stock prices are supposed to induce companies to invest their capital and hire more. At least that's how it worked in the past.
But this Recession is the Mother of Them All. Achieving profits on the backs of their workers in a country where consumer spending accounts for 70% of GDP won't help Main Street and the economy beyond Wall Street at all. Certainly it won't increase consumer demand. The question is, will business invest? Will the private sector make up for lower consumer demand and a smaller-than-necessary government stimulus?
The jury is out on those questions:
In a classic economic recovery...rising profits and stock prices help make the recovery self-sustaining by encouraging companies to hire more workers.
What is still in doubt, though, is whether this is a classic recovery.