For big multinational companies, life is good. For Mom and Pop, not so much.
Two years after the official end of the recession, profits at large U.S. corporations are growing at such a brisk pace that they are on target to completely erase their 2008 declines and return to the long-run average.
Meanwhile, stock prices have nearly doubled since the bottom and are closing in on pre-crisis levels, almost as if the crash had never happened. But of course it did happen, and for most of Main Street the picture is not much brighter today, as 14 million unemployed Americans can attest.
So how can one explain the dichotomy? In a word, globalism. For the great majority of large firms, demand from foreign customers is the driving force in burgeoning sales and profits.
According to Standard & Poor's, nearly half of S&P 500 companies' sales come from outside the United States. Chip maker Intel, for example, garners only 14 percent of
total sales from American customers. For these mega-firms, profits are booming as developing economies continue to expand at a rapid rate.
While this inexorable trend is good for stockholders, it does little to pump up U.S. employment. The job creation driven by this additional demand is largely occurring elsewhere, and not only as a cost reduction measure but also to move production closer to critical target markets.
Small firms, on the other hand, are stuck in the mud. Fully 98 percent of companies in the U.S. are not traded publicly. These small businesses play a critical role in providing employment for American workers, and have historically created 65 percent of all new jobs. Yet these companies are not yet enjoying the effects of the recovery, since most of their sales are not to rapidly growing Asian countries but domestic consumers with ongoing financial challenges.
Credit not the problem
According to the National Federation for Independent Business, small firms are still suffering declining profits due to depressed demand and escalating material costs. The association's monthly small business optimism survey has declined for four consecutive months, implying no improvement in business conditions facing their member firms. As a group, they are pessimistic about future growth, and have zero hiring plans until they see better prospects ahead.
Members of the NFIB report that their biggest obstacles are weak sales, high taxes, and regulation and red tape.
Interestingly, only 3 percent of members cited lack of credit availability as their number one problem.
Hence the apparent disparity between record earnings and seemingly intractable unemployment. Swelling profits at multinational corporations are driving share buybacks, dividend increases and stock price gains. Meanwhile, recovery on Main Street remains elusive.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Chris Hopkins is vice president, investments, at Barnett & Co. Inc. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at dflessner@timesfreepress.com.