It’s Coming

It’s coming. And don’t kid yourself into believing it won’t. It happens in every cycle. The economy comes out of a recession, things recover (these days with the help of central banks) and the cycle ultimately morphs into unrealistic positive expectations about the future and optimism reigns supreme as unemployment drops to cycle lows and corporate profits look great.

We just had this phase in 2018 on the heels of tax cuts and the official unemployment rate dropping to 3.7% with record earnings and over 20% profit growth thanks to tax cuts.

But then something happens at the end of each cycle. Corporations have a harder and harder time keeping pace with the high expectations. It’s called peak profit growth. One can squeeze only so much profit growth out of each cycle. And now, in this cycle, the artificially induced profit growth results in 2018 are not sustainable into 2019.

So what, you might ask, will companies do to maximize their profit growth in a challenging comparison environment, an environment where they are facing higher costs and margin pressures due to a myriad of reasons? Think rising rates, trade wars, difficulty to find new talent, etc.

You already know the answer: It’s called rightsizing, operational efficiency and a number of other clever guises designed to avoid the term layoffs. And no it doesn’t suddenly happen in size. It starts small, but it begins nevertheless. You just have to look for the signs.

Here’s one current example:

“Starbucks Corp., on a mission to boost profit and appease apprehensive investors, is dismissing about 5 percent of its non-restaurant workers.

The company said it’s laying off about 350 corporate employees, most of whom work in its Seattle headquarters. Starbucks had said in September that an unspecified number of job cuts were coming. The coffee chain is restructuring to speed innovation and pump slowing sales.”

And you get the talk of “oh how difficult it is, but we have no choice” blah blah blah:

“Today will be a difficult day for all of us,” Chief Executive Officer Kevin Johnson said in an internal email to employees viewed by Bloomberg News. “As we continue evolving our core areas of marketing, creative, product, technology and store development, we are making some significant changes to these areas, as well as other functions across our global business.”

We just have to do it right? Can’t afford those salaries of these people right?

Bullshit. These 350 people are losing their jobs in the face of this:

Starbucks is raising its dividend and increasing its share buyback program to return $10 billion more to shareholders by 2020 than previously promised, CEO Kevin Johnson told analysts on a conference call Thursday.

In November, the company announced it would return $15 billion to shareholders through buybacks and dividends through fiscal year 2020″.

Right. Oh yea, the writing is on the wall and it’s already beginning.

For reference we are here in the unemployment versus market cycle structure:

Now you may choose to believe we stay at 3.7% unemployment forever or you may not, but history suggests a reversion to the historic mean is coming.

But here’s the kicker: With the advance of AI, automation and robotics in recent years, and more technological improvement to come, when the next downcycle begins in earnest, corporations will not only have more incentive than ever to automate, they will have technological options at their disposable like never before.

Technology after all is improving rapidly and I’m sure you’ve seen some of the more recent impressive examples in the headlines:

There are a ton of studies on this from the scary to the don’t worry. I humbly submit that nobody knows how this will play out, but I do know one thing: Corporations will do what’s best for them and their primary purpose is not to guarantee you a job.

Rather it’s maximzing shareholder value. And whether you like it or not it’s buybacks and dividends while streamlining and finding ways to maximize margins.

And that may or may not impact you. Some of these changes coming will be positive and fascinating, but these changes will also impact real people with real jobs and the I think it’s fair to say the transition will be far from smooth for many.

But let there be no doubt: It’s coming. And then the cycle repeats itself.

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Authored by: Sven Henrich

Categories: Opinion

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