The Shrinking of Corporate America


Wall Street Journal

Fourth-Quarter Profits Jump as Banks, Airlines, Factories Cut Spending, Payrolls

By PAUL VIGNA And JOHN SHIPMAN

Now showing this earnings season: the Incredible Shrinking Corporation.

Since the start of the recession two years ago, corporate and consumer balance sheets have been engaged in a forced bout of cutbacks that figure prominently in fourth-quarter earnings reports coming out now.

The signs are everywhere. General Electric Co.’s chief financial officer on Friday referred to the “focused shrinkage” of its financial unit. A day earlier, Target Corp. said it plans to test stores that will have 50% fewer items.

Of course, cutbacks of staff, assets and inventories have helped the bottom line. Earnings for companies in the Standard & Poor’s 500-stock index are running above last year’s disastrous fourth quarter, which marked the first time the S&P 500 as a group lost money. With about a quarter of the 500 companies having reported fourth-quarter results, profits are up 154% over a year ago.

But the shrinking has had broad impact. If you’re already unemployed, it’s harder to find a new job. Nearly 40% of the unemployed have been jobless for 27 weeks or more. And if you’re lucky to still have a job, your wages aren’t growing enough to keep pace with even meager inflation. Bureau of Labor Statistics data show seasonally adjusted average hourly earnings up 2.2% last month versus a 2.3% rise in consumer prices. Companies enjoying the fruits of profit growth with a slimmer silhouette evidently aren’t in a hurry to start hiring again.

In reaction to a sharp pullback by consumers during the recession, Corporate America clearly has been on a strict no-fat diet, with banks, airlines and manufacturers among the more high-profile industries getting a lot skinnier. The aim is regaining what investors value most: fatter profits.

Corporate cuts have been most noticeable in capital spending and payrolls. Capital spending fell roughly 22% last year, according to Standard & Poor’s. As for the work force, the nation’s 10% unemployment rate speaks for itself.

Take a look at Intel Corp. Headlines touted the chip maker’s fourth-quarter profit, achieved through cost cutting. But since its peak in 2005, Intel’s revenue is down 9.5% and its earnings are down nearly 50%. The company’s work force? It’s at 2003 levels.

Intel may be producing enviable profit growth again, but it’s a markedly smaller company.

The airline industry provides another example. As a group, airline revenue fell by a record 18% last year—wider than the 14% decline amid the turbulence of 2001, according to the Air Transport Association. Airlines have cut capacity, which means fewer routes and fewer flights. For the average flier, that means smaller crews loading baggage, fewer flight attendants and fewer pilots.

Total airline employment was down almost 10% through November from two years earlier, according to the Bureau of Transportation Statistics.

Next exhibit: Citigroup Inc. The poster child for financial distress is getting back on its feet, in part by reducing “the size and scope of the company,” Chief Executive Vikram Pandit said when the bank reported fourth-quarter results last week. The slimmer Citi has shed one-third of its employees and unloaded $500 billion in assets it was no longer willing or healthy enough to carry around.

Similarly, GE is in the process of condensing its capital-finance unit, once the locomotive of its profit. During GE’s conference call on Friday, Chief Financial Officer Keith Sherin mentioned the unit’s “focused shrinkage.”

“GE Capital,” he said, “will be a smaller but more meaningful contributor in the future.”

—The Upshot will run daily during earnings season.

Write to John Shipman at john.shipman@dowjones.com and Paul Vigna at paul.vigna@dowjones.com

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