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To be sure, many of the companies missing their revenue targets are grappling with their own unique problems, says John Butters, senior earnings analyst at FactSet. AT&T reported that fewer people signed up for phone plans. Boeing delivered just one 787 before the planes were grounded in January because of overheating batteries. But the recurring theme is weak demand, says Tom Porcelli, chief U.S. economist at RBC Capital Markets. Businesses and individuals just aren't spending enough to push sales up quarter after quarter. "The economic backdrop remains sluggish," he says. "It's really as simple as that." In the U.S., recent reports showing sagging retail sales and a slump in business orders for big-ticket items have raised concerns about a slowdown. But it's a worldwide trend, Porcelli says. Economists like Porcelli check surveys to see if manufacturers around the world are ramping up or slowing down production. As of last week, fewer than a fifth of the 34 developed countries reported more activity, down from a third at the start of the year. Back in 2011, three-quarters of these countries said production was picking up. To keep profits rising, companies have been cutting costs to compensate for tepid sales. They have delayed plans to replace equipment, laid off workers and been slow to hire them back when things look better. In short, Corporate America and the people they employ are top notch at doing more with less. During earnings calls this month, five of the country's biggest banks revealed that they have slashed more than 31,000 jobs over the past year. That's 3.5 percent of their combined workforce. JPMorgan plans to lay off even more, aiming to cut nearly 7 percent of its employees over the next two years. It's a "perfectly sensible reaction" when sales results prove disappointing, Porcelli says. The problem is that cost-cutting has its limits. U.S. companies already run more efficiently than they once did. They squeeze 9 cents of profit out of every dollar of revenue, compared with an average closer to 7 cents since 1979, according to Goldman Sachs research. Analysts expect this profit margin to reach 9.8 cents next year. Jeffrey Kleintop, the chief market strategist at LPL Financial, is skeptical that companies will be able to shed enough expenses to hit their earnings targets. "When there's no more fat to cut," he says, "you start to cut muscle, and then you're cutting bone." In a strong economy, a single company can support its profits through payroll cuts. It's another story entirely when, in a choppy economy, scores of big companies decide to make the same move. Even delaying hiring plans can backfire. "It's a conundrum," Kleintop says. "Businesses say they're not going to hire until they see better growth, but there's not going to be better growth until there's more income and hiring." After all, one company's employee is another company's customer.
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