Workers’ gains could fuel economic growth

Companies may be poised to rely less on cost-cutting, more on consumer spending

NEW YORK — Wall Street is hopeful that US companies, after years of gaining ground at the expense of their employees, will start to succeed because of the rising fortunes of those workers.

Less than a week after the Dow Jones industrial average hit its record high, the broader Standard & Poor’s 500-stock index is on track to surpass its own 2007 high. The reason, in no small part, is because of investor confidence in the growing economic strength of US households.

This is a shift from the last few years, when stocks and corporate profits soared primarily because of cost-cutting and increased productivity from a shrinking or slow-growing workforce. The Federal Reserve’s stimulus programs helped corporate America, but did little to help improve the lives of most workers, whose wages declined while unemployment remained stuck at high levels.


A surprisingly good employment report on Friday was the strongest of a number of recent indicators that the benefits of the Fed’s program are now starting to trickle down to ordinary Americans, who should, in turn, push up sales at US companies. In addition to brisk job growth in recent months, the February employment report gave some of the first evidence of a sustained upturn in wages, and showed that it was spread across many industries.

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The improving job market could falter, particularly if cutbacks in government spending mandated by the so-called sequester take a bite out of economic growth. But even a more modest upturn comes not a moment too soon for US companies.

Growth in corporate profits has slowed as gains from productivity and cost-cutting reach their limits. Many strategists are seeing signs the slowdown in expense reduction — the so-called bottom line — is being made up for by top-line growth in revenues from reviving US consumers.

‘‘You can only cut and cut and cut for so long; eventually you have to have growth,’’ said Paul Hickey, a founder of the Bespoke Investment Group. ‘‘Now we’re starting to see some signs that is happening.’’

After six straight days of gains, the S&P 500 closed Friday just 14 points from the record high of 1,565.15 it hit in October 2007. Factoring in inflation, the index is far from earlier peaks, as is the Dow.


The automatic federal spending cuts have not yet appeared in economic data, and there are fears it could exert a future drag on the recovery. But Friday’s employment report — a gain of 236,000 jobs and a decline in the jobless rate to 7.7 percent — suggested Americans have shrugged off the payroll tax increase.

Even if corporate revenues climb further, it will not necessarily lead to rising share prices. Investors have already factored the optimistic economic signs into their investments. What’s more, skeptical strategists say, there are significant threats ahead for both consumers and corporations.

The basic fear is that the recovery will not be able to survive the Fed’s ending its bond-buying programs. When the Fed does step back from its support for the market, it is expected to send up interest rates, which could dampen lending and the housing market.

But the Fed has so far been adamant that it will maintain its support for the economy at least until the unemployment rate drops to 6.5 percent.