High unemployment here to stay for a while

Posted by Don on October 20, 2009

If anyone has been looking at earnings lately the average stock is beating their earnings estimates for the 2^nd quarter.  According to Peter Boockvar, his earnings cheat sheet shows about 83% of companies beating their earnings estimates in Q3.  Granted the expectations are lower than previously thought, but does anyone find it amazing the cost savings by the companies from the layoffs and spending cuts they have made?

I have a theory and that theory is that two things happen when companies lay people off.

1. The employees that are laid off are the least productive, so the company receives a benefit in cost per employee than they had previously.
2. The workers that are not laid off begin to put in more hours and take on more work to make themselves more valuable.  This also provides an efficiency boost to the company.

I don’t have any proof that what I am saying is correct.  The slower economy may have been the catalyst for reduced employment, however it has also allowed American corporations to gain efficiency which has allowed earnings to decrease at a slower rate than revenue.

The next question is what will be the catalyst that will require companies to begin hiring again.  Until we see sustained telegraphed growth we are not likely to see hiring pick up anytime soon.  As natural growth picks up we should see government spending (stimulus, extended unemployment benefits, etc.) slow down which would keep overall growth relatively flat.

The bad news for all of us is that the more unemployment goes up it drives the rest of our wages down, because there are people out there looking for work who would do our job for less.