A quote from a recent post of Barry Ritholtz’s at Bloomberg jumped out at me:
A recent research report by JPMorgan found that when markets see consecutive quarters of earnings declines, the economy slips into a recession 81 percent of the time. What do you make of this?
That was something I was complaining about in the depths of the Great Recession. A company sees a couple of quarters of declining earnings and management starts to take action. Puzzlingly, the action is never to cut the CEO’s salary or develop new products. It’s always to tighten the belt by laying people off. When you have enough companies doing that, the whole economy slides into recession.
BTW, you might want to to consider the graph at the top of the page long and hard. It tells a story and it’s not a particularly cheery one.
“A company sees a couple of quarters of declining earnings and management starts to take action.”
That’s a good thing, you know. The business landscape is littered with the corpses of enterprises that contemplated their navels.
“Puzzlingly, the action is never to cut the CEO’s salary or develop new products.”
Cutting the CEOs salary may be the right thing to do as a signal, and perhaps even morally, but it would matter financially in only the rarest of cases.
“It’s always to tighten the belt by laying people off.”
Many people are employed the minimize the expenses of procurement: materials, utilities and other inputs, or the expenses of administration. There’s always ways to find savings, but head count is almost always the predominant one in a reasonably well controlled company.
“When you have enough companies doing that, the whole economy slides into recession.”
Surely you do not mean to lay the root cause of recession off on layoffs as opposed to market demand. Over reaction certainly exists, but that is simply the reason for creating as stable and certain an environment as possible, something at which our policy makers, well, suck.
What I’m saying is that it isn’t hard to create a positive feedback loop leading to recession.