| BUSINESSWEEK ONLINE : MAY 17, 1999 ISSUE | ||||||||
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| CORPORATE SCOREBOARD
As If Labor Costs Weren't Worrisome Enough... In the battle of the corporate budget, U.S. businesses have enjoyed an offset to their rising labor bills. During most of the 1990s, the price of everything else needed to run a business--from computers to phone service--has fallen, in some cases sharply. But this year and next, businesses will likely have to contend with higher interest rates and rising prices for energy and other materials. ''It will be harder for companies to use nonlabor costs to protect margins,'' warns Edward F. McKelvey, senior economist at Goldman, Sachs & Co. That's one reason why, despite a surprising surge in first-quarter earnings and strong projections by other economists, he expects aftertax profits to be about flat for all of 1999. To be sure, labor costs are still the 800-pound gorilla of business expenses, constituting some three-quarters of total outlays. But the price declines for equipment, raw materials, and energy have freed up money to pay workers more. Companies also bought breathing room by redesigning products to use fewer materials and refinancing debt when interest rates fell. Such cost savings expanded the bottom line even as demand for labor pushed wages higher. So far in this expansion, nonlabor costs for each unit of output produced at nonfinancial corporations have fallen about 1% a year, while, despite stellar productivity gains, unit labor costs have risen 0.9% a year. Three big items have led the decline in total nonlabor costs. Thanks to falling bond yields, nonfinancial corporations paid $38 billion less in interest in 1998 than they did in 1991. Over the same time frame, oil prices plunged 46%, and prices of other commodities such as steel, rubber, and textiles fell 14%. But don't expect those trends to continue into the next millennium, say forecasters at Standard & Poor's DRI. As S&P DRI sees it, corporate bond yields will rise by half a percentage point by the end of 1999, responding to a pickup in global borrowing and expectations that U.S. inflation will rise about 0.5%. Industrial commodities, S&P DRI says, will increase at a 2% annual rate in the second half. Most of that runup will come from fuel prices, but nonenergy commodities will also get pricier as global demand picks up (chart). None of these increases is big enough to set off inflation tremors, and prices for equipment, especially computers, should slip further in 1999. The bigger problem for the profit outlook is that businesses won't be able to count on cheaper raw materials to cover higher wages. REVERSAL? Of course, price increases create both profit winners and losers. Higher crude prices are a boon to oil companies but a bane for airlines and trucking companies. More money for raw materials will benefit mining concerns and commodity producers. And higher interest expenses are booked as income gains at banks. In a way, 1999 might mark a reversal in cost trends. Partly because of weak profit performances in 1998, businesses have tried to slow the rise in wages and salaries by cutting overtime or offering stock options. If successful, such strategies might allow them to offset the margin squeeze coming from higher costs outside of corporate payrolls. By Kathleen Madigan in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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Corporate America's Profit Surprise TABLE: The Quarter's Winners and Losers CHART: A Spotlight on First-Quarter Profits As If Labor Costs Weren't Worrisome Enough... CHART: An End to Cheaper Commodities? TABLE: First-Quarter 1999 Corporate Profits (.pdf) INTERACT E-Mail to Business Week Online | |||
