Citi Executive: 'Corporate Sector Cannot Continue To Simply Cut Costs'

High corporate profits have been one of the few bright spots for the global recovery. One high-level financial executive isn't so sure that success can be sustained.

Richard Cookson, global chief investment officer at Citi, told CNBC's Squawk Box on Tuesday that corporation's reliance on cost-cutting to increase growth may soon run out of steam. Many corporations have posted strong profits during the recovery, largely due to cost-cutting and increased productivity from the consequently diminished workforce. That model is simply not sustainable, says Cookson.

"In aggregate, the corporate sector cannot continue to just simply slash costs rather than have top-line growth," he told CNBC. "It just doesn't work."

Corporate profits hit an all-time high of $1.68 trillion in the fourth quarter of 2010, subsequently maintaining solid growth. Three out of four companies on the S&P 500 saw larger profits than expected in the second quarter of this year, according to Bloomberg. But Cookson contends diminishing margins make that a temporary fix at most.

With such positive numbers, Cookson admits "there's not a single market on God's earth where the consensus of analysts have predicted a fall in profits," but others like himself are worried that corporations have done little to stimulate real growth. According to Slate, S&P 500 companies are sitting on more than $1 trillion. Rather than using it to create jobs, however, many are instead hoarding it, waiting for a better return.

Signs of productivity tapering off have already manifested in the economy, according to the Labor Department. Declining productivity could mean bad news for potential hires. It could also be just the opposite: Overworked employees, unable to cope with increasing workloads and decreasing benefits, could be maxing out.

Watch the interview with Richard Cookson on CNBC here:

Comments

[Fahrenheit 451 usedbooks]

11:10 AM on 09/01/2011

Did you get that yesterday on the news Yesterday, Verizon, e-bay, Ford just to name a few paid higher salaries than taxes paid and I will bet anything! That the taxes unpaid and the loophole and tax credits dollars received combined exceed all benefits (or a great deal of) paid to the workers, so basically we paid the employee’s and they made the profits that’s a deal!
Whose doing the labor economics? Profitability does not create jobs its basic economics a profit is a lost, withheld or stolen wage depending on how far left you are; and I am very far! so how could more profits create more jobs, doesn't add up more mickey mouse math and trickle down economics.

[LoyalDem4646]

04:04 AM on 09/01/2011

He's actually admitting that corporations aren't hiring. The republicans never get this part. Well if you read this article, this is what's been happening for 8 years under Bush. The republicans have just never been able to think past the first step of their plan.

[Veri]

04:41 AM on 09/01/2011

Wait, haven't the Tea-Publicans been telling America that if we give more tax breaks to the wealthy and corporations that they will create jobs? That these wealthy people and corporations are 'job creators'?

That corporate and personal taxes are too high when it comes to record profits, record bonuses, and corporate CEO pay?

What they really mean is $1.68 trillion in profits, the top 10% owning almost 90% of all wealth in America, offshore tax havens, untaxed American corporate foreign cash hoards, and privileges of the wealthiest are... STILL NOT ENOUGH!

Besides, the politicians just want to join that exclusive club. Congress, especially Tea-Publicans, is nothing more than a Yellow Gold-Bricked Road to joining the wealthy world that most Americans, despite their fallacious American Dream (delusion), will never join.

You are untermensch.

Welcome to The New Wealth Aristocracy.

[beerbagger]

02:55 AM on 09/01/2011

Last time I checked materials don't put themselves together to make anything... even robots that make stuff. And robots don't go to Walz-Mart to buy cheap Chinese socks either.

[Mike Keough]

01:03 AM on 09/01/2011

You call this news? Us unemployed moochers, who have been sitting around collecting the Dole for years, bring this up at the coffee house every morning, sure as we are now eating cake... hell, we been saying that for years. How are they gonna increase profits when everyone is laid off and no body buys s*it?
But what is funny, is when a director at Citibank starts sounding like Paul Krugman... who again, has been saying this for years.

[jodieez]

09:57 PM on 08/31/2011

They can not continue to make more, with less because, the fewer employees the fewer consumers to buy the products made by those overworked employees.

[Frankling]

08:38 PM on 08/31/2011

"In aggregate, the corporate sector cannot continue to just simply slash costs rather than have top-line growth," he told CNBC. "It just doesn't work."
So, in translation, they've laid off as many people as they can while still maintaining operations, so now they'll have to start raising prices to satisfy their lust for revenue growth. That's the kind of thinking that led to the recessions of the late 19th century. When sales and revenue dropped, factory owners raised prices, so sales dropped further because fewer people could afford their products so the owners raised prices again and sales dropped further until finally the owners ended up shuttering their factories and everybody lost out.
I guess it's never occurred to Cookson that the rest of us might just quit playing their game all together.
What happens when one Monopoly player ends up with all the cash and property? Game over.

[Sci-Fy-Fact]

06:52 PM on 08/31/2011

And governments can't re-ignite the economy with austerity either.

Mr. Cookson please talk some sense to your wealthy clients, and tell them that supporting the Tea Party is self destructive.

A rising tide lifts all boats, but a sinking boat will eventually flood the first class cabins too.

[wardropper]

02:58 PM on 08/31/2011

"In aggregate, the corporate sector cannot continue to just simply slash costs rather than have top-line growth - It just doesn't work"

Wrong.

The corporate sector cannot continue simply pretending that paying shareholders and CEOs increasing dividends, without actually producing something which consumers need and want, could possibly work.

The real world is going to reach you too - and sooner rather than later...

[Frankling]

08:42 PM on 08/31/2011

They're not even paying out dividends. They're sitting on the cash and doing stock buy-backs to crutch up their share prices. If that continues, they might end up being privately held companies with monopoly power over their market sector. The government can barely do anything to publicly held companies, from all the corporate influence over the government, but they won't be able to touch any privately held companies.

[LJIESQ]

01:05 PM on 08/31/2011

The corporate model needs to be destroyed.

[wardropper]

02:59 PM on 08/31/2011

Fanned for simple truth.

[Frankling]

08:49 PM on 08/31/2011

I don't know if the corporate model should be destroyed, but the artificial entity that a corporation represents shouldn't be given the same rights and priveleges as living human beings.
A corporation, for all the business advantages, behaves like a sociopath, a big baby with no consideration for anyone or anything beyond its own desires, in the case of corporations, unlimited profits and no legal restraints on their activities.
The tea party should take a hard look at their ideas for smaller government and question the source of those ideas. Smaller government would serve the corporate realm before it had any effect on any governmental restraint on the activities of average citizens.

[LJIESQ]

01:47 PM on 09/01/2011

Thanks for posting several arguments in support of my position.

[mjtaylor22]

12:31 PM on 08/31/2011

Its fake profits..slash n burn budget at the corp. level... over worked ...workforce....who really cares what type of service they deliver when the management will drop you like a hot potatoes so the ceo can make bonus next quarter....no matter your work ethic.......

[ScottV]

11:20 AM on 08/31/2011

Ya Think!

[Mrald]

10:55 AM on 08/31/2011

Corporations are too top heavy....too many chiefs and not enough indians. The chiefs get paid far too much for far too little that they do.

The focus with most companies has become customer service......gee, in days gone by good customer service was a natural happening. Get rid of a few highly overpaid executives and hire more people for the ground level.

When I walk through stores I can easily pick out a district manager...he is the one who DOESN'T GREET CUSTOMERS AS THEY WALK BY! I guess he forgot he should SET THE EXAMPLE !

[Frankling]

08:54 PM on 08/31/2011

The corporations have to make "chief" jobs for all the frat boys the Ivy League keeps turning out!
Have you looked at the board roster of any large corporation lately? The descriptions of the individual members fairly scream "frat boy" and if they had personally accomplished the goals that are associated with their names, they would all be 200 years old, at the least.

[Ozarks]

10:53 AM on 08/31/2011

Years ago, when Montgomery Ward was in serious competition with Sears, vying for big box department store market, it adopted the "horde cash" business mode. See where it got Monky Ward.

[ScottV]

11:21 AM on 08/31/2011

We used to go to Wards all the time when I was a kid. To bad because Sears is still crap.

[blood1]

09:53 AM on 08/31/2011

The takeaway: Corporations are running out of suckers to invest!

When a corporation/ WS bank, etc fail, they will continue to blame everyone but themselves.

[Ken Detweiler]

09:32 AM on 08/31/2011

"Rather than using it to create jobs, however, many are instead hoarding it, waiting for a better return. " ... trickle-down theory in action :-(

[Raccoon1]

09:40 AM on 08/31/2011

........reducing demand, requiring more cost cutting, reducing demand, requiring more cost cutting. This is the same thinking that Republicans use in their idea of reducing the deficit.

You have to spend money to make money. Continual cutting back takes you to zero eventually.

[Ken Detweiler]

10:12 AM on 08/31/2011

takes "us" to zero. Well at least with the Republicans we can vote them out. Theoretically we can do the same with corporate executives but ... lotsa luck. Now if only they can get rid of those pesky government regulators.

[wardropper]

03:02 PM on 08/31/2011

Sure you have to spend money to make money - but what if you're only pretending that you have the money to spend...?

That's why we need proper regulators, not the corporate-approved ones.