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

Nathaniel Popper
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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."

Solid February Jobs Report

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.

"How do you wean an economy off of this easy money policy, which was never meant to be as protracted as it has become?" said Edward Marrinan, the head of macro credit strategy at RBS Securities.

But the Fed has so far been adamant that it will maintain its support for the economy at least until the unemployment rate drops to 6.5 percent. The trajectory the economy has been following is what Fed officials broadly projected when they began giant purchases of bonds in 2008. The money was expected first to shore up the balance sheets of the banks and then help push up the stock portfolios of higher-income Americans. But lower interest rates were also expected eventually to lift the housing market, and then corporate investment in new employees. Data released in recent weeks suggest both are happening.

A number of Wall Street economists responded to the February jobs data by increasing their projection for economic growth this year. Goldman Sachs raised its estimate to 2.6 percent from 2.2 percent, while the bond guru William H. Gross went further and doubled his firm's previous projection to 3 percent in an interview with Bloomberg Radio.

The Ford Motor Company is one of many that came into the year facing expectations that its revenues would stagnate as a result of a recession in Europe and budget fights in Washington. The company did show declines in its European sales, but it surprised analysts by reporting a 5.5 percent increase in revenue in the fourth quarter compared with a year earlier. In January and February, the company's sales have continued to be better than expected. Ford executives have shown their confidence by announcing a new hiring push, including 450 jobs at a plant in Ohio.

"We are seeing housing really kick in a little bit more," Ford's chief economist, Ellen Hughes-Cromwick, said in a March 1 call. "I think it's encouraging to see that consumers may have a little bit of nerves of steel in light of the sequestration."

Most Americans are still far from the income they had before the crisis, and many of the new jobs are not particularly stable or high paying. But Jim O'Sullivan, chief United States economist at High Frequency Economics, said there were the foundations for a virtuous circle.

"This is how growth feeds on itself — increased employment leads to increased spending," Mr. O'Sullivan said.