reasons for bad economy

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Layoffs at U.S. Companies Portend Poorly for 2012 Prospects

Anticipating a sluggish economy for the rest of this year and into 2012, several major U.S. companies have set aside money to pay for possible layoffs and plant closures.

Such moves will help corporations maintain earnings growth, but will add pressure to the U.S. unemployment rate, which for more than two years has been stuck around 9%.

Some analysts worry that the talk of layoffs at some U.S. companies could trigger others to consider cutting positions, which in turn would cause further damage to an already stagnant economy.

"In many ways, this is part of the negative feedback loop," Deane Dray, an analyst at Citigroup Global Markets, told The Wall Street Journal. "Once you start head-count reductions and plant closures, you are adding to the unemployment, you are adding to the anxiety in the market."

Of course, it's not the job of chief executives to worry about what impact their decisions have on the overall economy. And having lived with an economy that just can't seem to climb very far out of recession, many CEOs feel it necessary to prepare for a challenging future.

"We all read the headlines," Danaher Corp. (NYSE: DHR) Chief Executive Larry Culp said last week during an earnings conference call. "It's better to be prepared and ready for what may come than to postpone what we think is a very prudent action."

Danaher said it would increase its fourth-quarter restructuring budget to $100 million - twice its previous amount.

Likewise, United Technologies Corp. (NYSE: UTX) raised its restructuring budget by a third to $300 million, and Honeywell International Inc. (NYSE: HON) said it would use $300 million it gained from a divestiture for restructuring.

United Technologies, which has already cut $188 million so far this year, says it is determined to hit its 10% earnings growth target for 2012.

"We're going to continue to push them to get toward 10%, and we're doing the restructuring now," United Technologies Chief Financial Officer Greg Hayes said on his earnings conference call last week. "We're doing whatever we can to try and make sure that that happens."

Jobs Under Siege

Many job cuts already were in the works well before the latest talk of restructuring.

As recently as this past summer, Merck & Co. Inc. (NYSE: MRK) announced that it planned to shed 13,000 workers by 2015; Lockheed Martin Corp. (NYSE: LMT) announced plans to cut 6,500; Cisco Systems Inc. (Nasdaq: CSCO) 6,500; Research in Motion Limited (Nasdaq: RIMM) 2,000; and Goldman Sachs Group Inc. (NYSE: GS) 1,000.

"These layoffs were very broad-based. Many of these companies are iconic companies, well known, big names," John Challenger, CEO ofChallenger Gray & Christmas Inc. told CNBC. "This is what precipitates out when you have an economy that is stalling."

According to Challenger, September was the worst month for announced layoffs in the United States in over two years, with both private and public sector employers slashing 115,730 workers -- more than double the number let go in Sept. 2010.

Dim Outlook

Even companies not talking about layoffs have lowered their expectations for the fourth quarter, and in many cases, for 2012 as well.

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Poll Misses Point: Washington and Wall Street Partners in Blame for Bad U.S. Economy

"Who do you blame more for the bad U.S. economy, Washington or Wall Street?" asked a recent USA Today/Gallup poll.

Wrong question.

In fact, it's the sordid relationship between the U.S. government and the big financial institutions that plunged the U.S. economy into turmoil in 2008 and has hampered its recovery ever since.

"They are brothers-in-arms against the greater good of the American public. They are conspirators," said Money Morning Capital Waves Strategist Shah Gilani. "Who is to blame, is it Wall Street for giving money to Washington to clear a path for their schemes, or is it Washington pandering to Wall Street for money to wage their campaign battles to put themselves in place to repay their paymasters?"

In the USA Today/Gallup poll, 64% of Americans blamed the federal government more for the bad U.S. economy, with just 30% pointing a finger at big financial institutions.

But the poll also indicated that the American public is extremely unhappy with both groups, with 78% saying that Wall Street bears a great deal or fair amount of the blame for the bad U.S. economy; 87% say that of Washington.

"You see the frustration that there's some serious things wrong with capitalism in America, but you also see the conundrum - how do we change it?" Terry Madonna, a political analyst and polling expert at Franklin and Marshall College told USA Today.

Close to half of Americans - 44% - also see the system as unfair to them, with some groups, such as people without a college degree (49%), feeling more mistreated than others.

Gilani couldn't agree more.

"Calling the "system' unfair is like calling the Grand Canyon a ditch," he said. "It's massively, incomprehensively unfair. It's unfair first and foremost on the macro level. The system favors the few at the expense of the masses. If there is class warfare stress in this country, it's because the nexus of Wall Street Washington manufactured it."

That Washington's efforts to fix the bad U.S. economy - very loose monetary policy on the part of the U.S. Federal Reserve and billions in stimulus spending from U.S. President Barack Obama and the U.S. Congress - have changed little is no doubt part of the reason why people remain disgruntled with government.

"The Fed is part of the problem, not part of the solution," Gilani said. "They did what they had to do to save us from going over the financial chasm, but they also helped us get there."

How to Fix It

Gilani had several suggestions on what should be done to make the system more fair as well as to prevent another financial crisis like we had in 2008:

  • Break up all the "too- big-to-fail" banks.
  • Regulate derivatives and determine what limitations need to be put on their use, by who, and when.

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