There are two ways to look at the profits reports that are emerging from corporate boardrooms, often after a brief stop for an added shine at the office 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 security 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 percent of companies thus far reporting exceeding analysts’ (modest) expectations, and their earnings increasing by 40 percent compared with last year, there is cheer in the counting houses.
Another way to look at these earnings reports is to tease out a few generalizations 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 twelve of the last thirteen months, and the amount outstanding is well over $100 billion less than it was last year. But 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. World War II intervened on this road to the easy life, but the thought 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 total 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 2009. 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 percent 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 percent 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 percent over last year’s level, and portable MacBook sales jumped 28 percent, propelled in part by the aura of innovation that now casts its glow over the entire product line. Sales of the new iPad won’t contribute to earnings until the current quarter, but indications are that Steve Jobs is on to another winner, sales being so high that the U.S. market sopped up all available supplies, forcing a postponement of the introduction of the device in European markets. So much for the sated consumer theory.
Jobs is promising “several more extraordinary products” this year. Meanwhile, staid old Nokia struggles to persuade consumers that its suddenly old-fashioned gadgets are worth having. So those who are guessing that 3-D television will prove a bust are under-estimating consumers’ willingness to open their wallets for the new, the usefully innovative, the daring.
There is another important clue about the U.S. economy buried in these glowing Apple figures. 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 percent of its revenues from international markets, for IBM and Hewlett-Packard international markets make up 64 percent of revenue earned, and for 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 they make a lot of what they sell outside the U.S., which suggests that the profits recovery will have to go a long way before it creates a domestic jobs recovery.
The profits 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 percent: 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 many cases. In the last three quarters of 2009 productivity -- output per man-hour -- increased at the phenomenal annual rate of 7-8 percent. Bad news for job seekers, good news for the long-run competitiveness of American industry.
All of this good cheer shouldn’t obscure a few very unpleasant fact. The U.S. 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, and not only for “the rich.” Companies are taking large write-offs to reflect the increase in costs imposed on them by the health care “reform,” and the Obama administration is determined to pass an energy bill that will raise energy costs, putting a crimp in consumers’ ability to spend on other things.
The innovators are providing the economic tailwinds. Unfortunately, the politicians are setting in motion the headwinds.