Minnesota's big companies delivered in the second quarter, but profit growth owes more to cost-cutting and productivity than employment expansion.
If we turned corporate America over to Fastenal Co., maybe we'd have a few million more Americans at work.
Besides reporting earnings growth of 61 percent on a revenue increase of 20 percent, the Winona, Minn., maker and seller of fasteners and other equipment for manufacturing and construction industries added about 200 employees in the second quarter, bringing full-time employment to about 10,300.
But the nuts-and-bolts company belies, to an extent, what's happening across corporate America.
Second-quarter profits among the Standard & Poor's 500 companies were up about 50 percent (or about 30 percent if finance and energy companies, which had easy year-ago comparisons, are thrown out) on revenue increases of about 10 percent, according to Oppenheimer & Co.
But most of the big companies, including 16 members of the S&P 500 based in Minnesota, are producing more profit from fewer employees as a result of layoffs in 2008-09.
"Corporate profits are doing pretty well because operating leverage and productivity are up, or they are doing business, such as 3M, in faster-growing parts of the world," said Phil Dow, stock market strategist at RBC Financial.
So far, Dow said, productivity has led the way. "And at some point, productivity gains will start to wane and they will hire more people and the recovery will spur more job growth," he said.
Yet the stock market last week was weighed down by concerns about rising unemployment claims and worries that consumer spending will not snap back.
The result is a disconnect: Big companies are doing pretty well, while the pace of the overall economic recovery has slowed to a crawl, and investor and consumer sentiment is waning.
"Corporations are more bullish than individual investors," Dow added. "And some of these companies are trading at attractive prices."
Big companies have returned to profitability and have a little more confidence about the future. But two-thirds of the S&P 500 companies based in Minnesota added significantly to cash reserves in the second quarter and paid down debt rather than invest more heavily in expansion.
"The economic data is mixed," Liz Ann Sonders, the chief investment strategist at Charles Schwab said last week. "Earnings season is largely in the book, and the mostly positive results we saw helped coax some investors back into the market. However, a large amount of trepidation remains."
Brian Belski, chief investment strategist at Oppenheimer & Co., said three out of four S&P 500 companies have reported higher-than-expected second-quarter earnings.
In Minnesota, the state's 16 S&P 500 companies saw earnings grow on average more than 20 percent on a 10 percent revenue increase.
In the second quarter, Minneapolis-based U.S. Bancorp saw a 46 percent rise in profits on a 3 percent revenue increase, as it had to put less money into reserve accounts to cover bad loans. And Ameriprise Financial, buoyed partly by a big acquisition of Columbia Funds, saw profits rise nearly 90 percent on a 36 percent rise in revenue that was helped by the dramatic rebound in financial markets over the past year.
Belski expects the second-quarter growth trend to continue through the end of the year and into 2011 for the S&P 500, although with less dramatic results for financial and energy companies. But he's concerned that unless more Americans get back to work there won't be enough consumers able to buy food, clothing and electronics from the big retailers.
Moreover, if the economic recovery continues to be dogged by high unemployment, the national mood will stay somber and even Americans with jobs and a full wallet will spend less than normal.
'Softer than expected'
Target Corp., one of America's biggest retailers, last week reported a strong, 17 percent increase in second-quarter net earnings on a modest, 3 percent increase in revenue.
CEO Gregg Steinhafel reported "softer-than-expected" sales, but Target benefited from cost savings partly because of laid-off employees who have not been replaced. Target shoppers spent less per visit than expected, but there were more shoppers in the stores.
The stock of Target, like that of some other big retailers, is trading at a 20 percent discount to its pre-recession highs.
Meanwhile, manufacturing and industrial concerns seem to be doing better and are more expansion-minded than the merchants and financiers.
Ecolab Inc., which sells sanitation products and services to restaurants, factories, property managers and medical clinics, posted a 15 percent quarterly earnings gain on a 5 percent revenue growth in the second quarter, outpacing the growth in the economy and its markets.
"We had expected a slow recovery, not terribly different from what we are experiencing," Ecolab Vice President Mike Monahan said. "But we continue to invest in product development, IT systems, our salespeople and others we need to grow our business."
Ecolab, its stock trading near its all-time high, expects to add more workers and conclude the year with a record 27,000 employees.
Fastenal also has been adding modestly to employee ranks in recent months as part of a long-term plan to take market share and expand partly through improved sales and service focused on its distribution and store operations.