Been Down So Long It Seems Like Up To Me, the precocious 1966 novel by the late Richard Farina, defined the late 1960s counterculture. The stock market rally that pushed the Dow Jones Industrial Average back above 9000 for the first time since early January could be given the same title, and it might well come to define the much-wished-for financial recovery.
What's pushing the stock market upward? Mainly, unexpectedly positive second-quarter corporate profits. But those profits aren't being powered by consumers who have suddenly found themselves with a lot more money in their pockets. The profits are coming from dramatic cost-cutting -- including, most notably, payroll cuts. If a firm cuts its costs enough, it can show a profit even if its sales are still in the basement.
The problem here is twofold. First, such profits can't be maintained. There's a limit to how much can be cut without a business eventually disappearing -- becoming, in effect, a balance sheet in space. Second, when businesses slash payrolls to show profits, consumers end up with even less money in their pockets to buy the things businesses produce. Even if they hold on to their jobs, they're likely to fear that they won't have the jobs for long, which causes them to retreat even further from the malls.
More after the jump.
--Robert Reich
