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  • Big profits, weak job market show a lopsided recovery

    Company earnings drive up stocks, but domestic growth remains tepid
  • WASHINGTON — Look at the U.S. economy and you'll notice an unusual disconnect.
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  • WASHINGTON — Look at the U.S. economy and you'll notice an unusual disconnect.
    The economy is being slowed by a tight job market, scant pay raises and weak business investment. Yet corporate profits are reaching record highs and fueling record stock prices.
    What gives?
    How are companies managing to earn so much money in a sluggish economy? And why aren't their profits goosing the economy?
    For starters, weak job growth has held down pay. And since the recession struck six years ago, businesses have been relentless in cutting costs. They've also stockpiled cash rather than build new products or lines of business. And they've been earning larger chunks of their profits overseas.
    All of which is a recipe for solid profits and tepid economic growth. The economy grew at a meager annual rate of just 1.8 percent in the first half of 2013. The unemployment rate is 7.2 percent, far above the 5 percent to 6 percent considered healthy.
    Here are factors economists cite for the gap between healthy corporate profits and subpar economic growth:
    FLAT PAY
    Wages and salaries equaled just 42.6 percent of the economy in the April-June quarter, near a record low set in 2011.
    More than 8.5 million jobs were lost in the recession and its aftermath, leaving workforces leaner and more productive. Corporate revenue rose as the economy recovered.
    But workers haven't benefited much. With unemployment still high, they've had little leverage to demand higher pay. Many have been happy just to have a job.
    The stock market's gains have boosted total U.S. household wealth. But they haven't enriched most Americans. The wealthiest 10 percent of households own about 80 percent of stocks.
    COST CUTTING
    This week, Kellogg said it would cut about 7 percent of its workforce — 2,200 jobs — by 2017. The cuts are part of a "global efficiency and effectiveness program," the company said.
    Even though Kellogg's sales were flat in the July-September quarter compared with a year earlier, it squeezed out 2.5 percent more net income. A key factor: It cut administrative and borrowing costs. Its shares have risen 15 percent in the past year.
    The average sales growth of an S&P 500 company was 2.35 percent in the first six months of 2013, down from 3.76 percent in 2012, according to S&P Capital IQ. The average profit margin for an S&P 500 company widened from 8.1 percent to 9.1 percent in the same period.
    CASH HOARDING
    Higher profits could help the economy if corporations plowed them back into new plants, equipment and other projects. That hasn't happened.
    Business spending on big-ticket items like computers, industrial machinery and capital goods has remained about one-third below the average in previous recoveries, Harris estimates.
    Instead, companies have stockpiled a record $1.8 trillion in cash, according to the Fed, up nearly 10 percent since the recession ended in 2009.
    GLOBALIZATION
    Rising international competition has lowered wages as a share of the economy in most developed countries, according to the Organization of Economic Cooperation and Development, a think tank in Paris. About one-tenth of the decline is due to competition from lower-wage countries, the OECD found.
    And big U.S. companies are earning a larger share of their sales and profits overseas than in previous decades. That means their profits and stock prices can grow even when growth in the United States is weak.
    Nearly half of all sales earned by companies in the S&P 500 index — 46.6 percent — are produced outside the United States. In 2003, the figure was 41.8 percent.
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