Citi Executive: Continued Corporate Cost Cutting Simply Not Sustainable

Your workforce are your consumers. Either literally, or through the web of connections they have with family and community. That was obvious to Henry Ford and to generations of executives who followed him in a wide variety of industries. But that lesson was apparently forgotten in the financial boom of the last decade.

It has been apparent for some time that there was an internal contradiction in the approach corporations have been taking to internal resource allocation and external policy formulation. Shareholders and executives like increasing profits and the bonuses and stock price increases they bring with them. They have also supported the 'shrink the government' ideology embraced by politicians on left and right. But reality has now caught up with rhetoric. The end of government stimulus is leading to tens of thousands of layoffs in financial services. And corporations are beginning to recognize that without customers, there is no future growth. At some point, you have to make something for someone, somewhere in the world, to buy.

When the Chief Investment Officer of one of the world's larget banks cautions businesses on the impact of continued cost-cutting versus growth, it is apparent that the future is now. Too bad it took so long to sink in. JL

Harry Bradford reports in the Huffington Post:

High corporate profits have been one of the few bright spots for the global recovery. One high-level financial executive isn't so sure that success can be sustained.

Richard Cookson, global chief investment officer at Citi, told CNBC's Squawk Box on Tuesday that corporation's reliance on cost-cutting to increase growth may soon run out of steam. Many corporations have posted strong profits during the recovery, largely due to cost-cutting and increased productivity from the consequently diminished workforce. That model is simply not sustainable, says Cookson.
High corporate profits have been one of the few bright spots for the global recovery. One high-level financial executive isn't so sure that success can be sustained.

Richard Cookson, global chief investment officer at Citi, told CNBC's Squawk Box on Tuesday that corporation's reliance on cost-cutting to increase growth may soon run out of steam. Many corporations have posted strong profits during the recovery, largely due to cost-cutting and increased productivity from the consequently diminished workforce. That model is simply not sustainable, says Cookson.

"In aggregate, the corporate sector cannot continue to just simply slash costs rather than have top-line growth," he told CNBC. "It just doesn't work."

Corporate profits hit an all-time high of $1.68 trillion in the fourth quarter of 2010, subsequently maintaining solid growth. Three out of four companies on the S&P 500 saw larger profits than expected in the second quarter of this year, according to Bloomberg. But Cookson contends diminishing margins make that a temporary fix at most.

With such positive numbers, Cookson admits "there's not a single market on God's earth where the consensus of analysts have predicted a fall in profits," but others like himself are worried that corporations have done little to stimulate real growth. According to Slate, S&P 500 companies are sitting on more than $1 trillion. Rather than using it to create jobs, however, many are instead hoarding it, waiting for a better return.

Signs of productivity tapering off have already manifested in the economy, according to the Labor Department. Declining productivity could mean bad news for potential hires. It could also be just the opposite: Overworked employees, unable to cope with increasing workloads and decreasing benefits, could be maxing out.