Non-Financial Companies have $1.8~ Tril, but aren't hiring

[MKSheppard]

Link

Corporate America is hoarding a massive pile of cash. It just doesn't want to spend it hiring anyone.

Nonfinancial companies are sitting on $1.8 trillion in cash, roughly one-quarter more than at the beginning of the recession. And as several major firms report impressive earnings this week, the money continues to flow into firms' coffers.

Yet all the good news from big business hasn't translated into much promise for jobless Americans, leading many to wonder: If corporations are sitting on so much money, why aren't they hiring more workers?

I won't quote the entire article; it's basically about the White House and the US Chamber of Commerce taking potshots at each other over this.

My own opinion on why there are so few hires is that there have been so many changes in US Law recently with Health Care Reform; and now Financial Reform coming down the pike; and possibly the Cap and Trade scheme on the horizon -- the companies are waiting on any major hires until all this shakes down and they've had time for the lawyers to go through the new bills and see how they affect the company before they add anything beyond attrition hires.

[ShadowDragon8685]

It presents a pickle, it does.

It also poses a question: What can (should) be done about it. Obviously, with unemployment on the rise and only going to get worse as Census 2010 wraps up and lays off something like a million people (myself unfortunately included unless I can find some way to sink in with both hands and get one of the rare and coveted permanent posts,) things are going to be bleaker.

Obviously, you can't simply mandate that a company expand and hire new workers. That would be, to put it mildly, draconian, not to mention moderately retarded, as it would lead to companies expanding without any direction whatsoever.

But as my uncle's fond of saying, "we may not be able to make you, but we can make you wish you had." It makes me wonder if there's some way to make that work here; provide such a huge disincentive to not hiring, that companies will do the math and decide that they're better off getting something out of the deal. Something like, I dunno, fining companies that provably can afford to hire more people and don't to the tune of what they should expect to expend on those people, considering training and benefits and what-not, over the next five years or so.

Probably not a workable idea, though it would certainly employ a lot of economists to predict and levy the fines!

[The Dark]

Link

Corporate America is hoarding a massive pile of cash. It just doesn't want to spend it hiring anyone.

Nonfinancial companies are sitting on $1.8 trillion in cash, roughly one-quarter more than at the beginning of the recession. And as several major firms report impressive earnings this week, the money continues to flow into firms' coffers.

Yet all the good news from big business hasn't translated into much promise for jobless Americans, leading many to wonder: If corporations are sitting on so much money, why aren't they hiring more workers?

I won't quote the entire article; it's basically about the White House and the US Chamber of Commerce taking potshots at each other over this.

My own opinion on why there are so few hires is that there have been so many changes in US Law recently with Health Care Reform; and now Financial Reform coming down the pike; and possibly the Cap and Trade scheme on the horizon -- the companies are waiting on any major hires until all this shakes down and they've had time for the lawyers to go through the new bills and see how they affect the company before they add anything beyond attrition hires.

My component manufacturers are concerned about the bullwhip effect more than new regulation. The distribution chain goes from manufacturers to distributors to me to my customer. My orders from my customer didn't change when the economy tanked, but my distributors started selling off their stock and not replenishing it. This made the manufacturers' orders drop even more severely than would normally have been the case. Now that the economy's turning around (and 70% of what my manufacturers are selling is going to Asia, so their recovery has exceeded what we're seeing), those distributors are filling new orders AND replenishing stock. The manufacturers aren't sure how much is real end user demand, and how much is temporary replenishment demand, so they're being slow to add new workers until they know what the stable work level will be. I'm not saying that's what every company's doing, but I've had three or four major suppliers tell me that, independent of one another.

[bobalot]

Maybe they aren't hiring because domestic demand is down?*

I'm guessing if there doesn't appear to be any likelihood of demand picking up companies would put off hiring.

*I'm not sure how this is measured. Could a resident economist can let us know?

[J]

There's several parts to the puzzle

• The companies project flat or falling business over the next few years, it doesn't make sense to hire workers when there's no real work to be done.
• There's a lot of financial uncertainty and problems with lack of credit, in the past companies could get away with holding less cash since if they ran low they could always take out a loan from the bank or do some refinancing to cover a temporary shortfall. This is now a lot harder to do, if they run low on cash they go bankrupt so it makes sense to hold a large reserve just in case.
• The forward costs of healthcare reform. I've been looking at the quarterly reports & other releases from various industrial companies and they're taking sizable losses from the healthcare bill, some companies could see their entire yearly profits wiped out by the extra costs. Caterpillar for instance would lose around half of their 2009 profits.
• Cash is safe, other investments such as bonds, mutual funds, and other such holdings were wiped out in fall of 2008. Companies used those instruments to fund returns for the pension & healthcare plans, after taking those losses some of them have wised up and moved their holdings into cash and US Treasuries.

[JME2]

[*]The companies project flat or falling business over the next few years, it doesn't make sense to hire workers when there's no real work to be done.

Therein lies the unfortunate paradox in stimulating the economy. To make money, you have to spend money and everyone's too scared to spend said money or invest at the moment. It's a pickle to be sure and unfortunate because things are getting insane, especially for the Millenials. And Shadow Dragon, I sympathize; I was doing part-time work for the Census, too and I'm not happy about that source of extra income drying up.

[J]

[*]The companies project flat or falling business over the next few years, it doesn't make sense to hire workers when there's no real work to be done.

Therein lies the unfortunate paradox in stimulating the economy. To make money, you have to spend money and everyone's too scared to spend said money or invest at the moment.

It's not quite that simple. We've spent the past 20 years or so living far beyond our means by using credit & loans while depleting what little savings we had, there simply isn't any more money or credit to be spent on the consumer end and as 70% or so of the US economy is consumer spending it leads to a bit of a problem. To use an example, the sustainable demand for cars is around 12-14 million units a year in the US, thanks to cheap & easy credit the demand was pushed all the way up to 20 million a year or so. When that credit is gone the demand collapses and there's absolutely nothing we can do to stop it, making more cars or production investments just leads to a larger glut which puts the companies under that much faster, it won't and can't make people buy more cars.

The same is true across all sectors of the economy, the final demand isn't there and cannot be created, trying to do so by spending more money is about as effective as pushing on a string. Until this chart gets back down to a reasonable level the final demand won't be there as the consumers & everyone else will be all tied up trying to pay off their debts, there isn't any capacity left to take on further debts for buying more widgets.

[JME2]

Yeah, that was a rather simplistic summation on my part. I'm just not happy to be caught in the middle of this financial quagmire.

[Broomstick]

I think J's hit it square on the nail - but I'll throw in my perspective from the bottom of the trenches anyway.

There's several parts to the puzzle

• The companies project flat or falling business over the next few years, it doesn't make sense to hire workers when there's no real work to be done.

I'm currently working as an independent contractor (while trying to keep leaping through loopholes in laws meant to "help" me and keep me from being "exploited" - never mind that right now they have the potential to eliminate all my income) because of this. NO ONE has enough business to keep people employed 40 hours a week in this area. Businesses are either explicitly shedding workers or else reducing formerly full time workers from 40 hours to 30 or 20 or even less. I have worked for :::counts on fingers::: one two three FOUR different employers/customers this year and, at best, I think I averaged 20-25 hours a week since January - and that only because of two months of working 10-12 hour days seven days a week.

Which is another form of torturous uncertainty: work is either feast or famine and you can't predict it in advance. Makes planning VERY difficult makes everyone, from individuals to families to small companies to large companies reluctant to spend because income is unpredictably uneven and everyone wants a cash reserve for the lean months.

[*]There's a lot of financial uncertainty and problems with lack of credit, in the past companies could get away with holding less cash since if they ran low they could always take out a loan from the bank or do some refinancing to cover a temporary shortfall. This is now a lot harder to do, if they run low on cash they go bankrupt so it makes sense to hold a large reserve just in case.

Small companies also have been using "float" for a couple decades - basically, very short term loans from banks. For someone like one of the general contractors I work for that would enable him to make payroll on time on a week when he wasn't paid on time by a customer, for example. Or purchase materials or rent equipment when something unexpected and unbudgetted happened on a job so he could still get the work done on time - but no one is providing "float" anymore. Not only does this make it harder for a small business to stay in business, it just adds further uncertainty to workers when they can no longer rely on steady paychecks.

[*]The forward costs of healthcare reform. I've been looking at the quarterly reports & other releases from various industrial companies and they're taking sizable losses from the healthcare bill, some companies could see their entire yearly profits wiped out by the extra costs. Caterpillar for instance would lose around half of their 2009 profits.

Which is why we need universal health care in this country, but let's not get side-tracked...

[*]Cash is safe, other investments such as bonds, mutual funds, and other such holdings were wiped out in fall of 2008. Companies used those instruments to fund returns for the pension & healthcare plans, after taking those losses some of them have wised up and moved their holdings into cash and US Treasuries.[/list]

Not much to add here.

[Illuminatus Primus]

My own opinion on why there are so few hires is that there have been so many changes in US Law recently with Health Care Reform; and now Financial Reform coming down the pike; and possibly the Cap and Trade scheme on the horizon -- the companies are waiting on any major hires until all this shakes down and they've had time for the lawyers to go through the new bills and see how they affect the company before they add anything beyond attrition hires.

American capitalism: no matter the woes, the solution is always the same. Dilute democracy and cede them more power and subsidy in the hope that in their following benevolence, they will provide some public benefit.

This is absurd. It is in their interest to not hire people, because it increases profits. The ideal capitalist firm sells something that is worth nothing, to a lot of people for a lot of money, and hires no people and spend no money making the nothing. This is the direct logical ideal by which, in general, all businesses are incentivized toward becoming. The perfect business is a best-selling scam with no costs and no employees, only profits.

[Broomstick]

Or, to put it another way - it seems quite a few businesses have discovered they can get by without hiring more people, so they don't. Why would they hire labor they don't need regardless of what their cash reserves are? Businesses are not charities, they don't exist to give people jobs, they exist to make profits. Sometimes making profit results in jobs for people, sometimes it doesn't.

[Illuminatus Primus]

Political propaganda about "creating jobs" should always be recognized for what it really is: "increasing profits". But I thought it was those black moms who were getting all the welfare, those pigs. Citibank, it works honest and hard (like a real American) for its ruggedly-individualistic superprofits.

[Simon_Jester]

You can create jobs; it's just not easy and not permanent.

Bringing a business to a state will employ some number of people in the state at useful labor that would otherwise not be available there, and some more people on secondary jobs that are only possible because more people in the state have more money to throw around.

But if doing so requires making major concessions to the business that get in the way of the general welfare (it does), and if they may up and leave in ten years when someone gives them a better offer (they might)... well, it does what it says it does but the price tag isn't worth it.

Of course, the other way to create jobs in an environment like this is direct government employment: hire enormous numbers of people to do labor-intensive construction projects, for example. They don't even have to be very cost-effective projects; the point of the exercise is to keep people busy doing something, so that they have money*, while getting something genuinely useful (like a new highway overpass) when the dust clears.

*And, in theory, so that they still feel like a productive chunk of the economy and not a disaffected, discarded piece of unnecessary labor...
________

Hmm. I wonder if this might be a good time for a corporate savings tax. We could have one in theory, though fat chance of getting it through Congress or the White House at a time like this. If companies faced a "use it or lose it" decision when it came to their stored cash, they might decide to take risks that would otherwise be unpalatable.

Though you'd need a way to cover for small businesses that would otherwise be screwed by the fact that they need cash savings in order to be sure of meeting payroll in an economy without "float," as Broomstick described. Maybe make the first N*X dollars of savings tax-exempt where N is the number of employees...?

But yeah, that's not happening.

[Starglider]

Hmm. I wonder if this might be a good time for a corporate savings tax. We could have one in theory, though fat chance of getting it through Congress or the White House at a time like this. If companies faced a "use it or lose it" decision when it came to their stored cash, they might decide to take risks that would otherwise be unpalatable.

If you put a tax on USD bank / money market holdings, they'll just transfer that money into overseas accounts or non-cash asset classes. Also dispose of it as executive bonuses and (maybe) dividends. In any case you'd have to make the tax pretty severe to significantly move the risk analysis for capacity expansion in a flat or declining market. Doing that has the same problem as raising normal corporation taxes; companies will relocate to cheaper countries, probably offshore tax havens.

A tax break on new hires is a better idea, even if you have to raise the general corporation tax rate to pay for it. The problem there would be idiot executives not appreciating the value of experience/training, and firing people just to get the tax break on their replacement. This would particularly be a problem with 'at will employment' states.

[ShadowDragon8685]

Hmm. I wonder if this might be a good time for a corporate savings tax. We could have one in theory, though fat chance of getting it through Congress or the White House at a time like this. If companies faced a "use it or lose it" decision when it came to their stored cash, they might decide to take risks that would otherwise be unpalatable.

If you put a tax on USD bank / money market holdings, they'll just transfer that money into overseas accounts or non-cash asset classes. Also dispose of it as executive bonuses and (maybe) dividends. In any case you'd have to make the tax pretty severe to significantly move the risk analysis for capacity expansion in a flat or declining market. Doing that has the same problem as raising normal corporation taxes; companies will relocate to cheaper countries, probably offshore tax havens.

A tax break on new hires is a better idea, even if you have to raise the general corporation tax rate to pay for it. The problem there would be idiot executives not appreciating the value of experience/training, and firing people just to get the tax break on their replacement. This would particularly be a problem with 'at will employment' states.

Like I said: make them wish they had. The problem is, of course, it will be abused or dodged.

I've always personally been in favor of some kind of a financial "flight tax." An egregiously large and painful one at that, discussed and voted on in a closed session, that goes into law immediately as soon as it is wrote down.

The idea being that all corporate (and for that matter, personal) transfers of funds out of the country for reasons of sheltering it from our regulators results in something ridiculous like 90% of it being seized at the border. A financial exit toll, as it were.

We'd have to conquer the Cayman Islands to enforce it, though.


The problem with offering corporations tax breaks or other incentives to, say, build a new site somewhere and employ people, is that the idea is very much like those teaser rates that the corporations themselves offer; IE, you get some ridiculously low price for the first two years, but then the rate jacks up to a stupendously high rate for the next three years, and you are locked in. Unfortunately, the corporations are (a) too dumb to fall for their own tricks, and municipalities, counties, and states don't wield enough power to force the issue, since they can always go looking for someplace even more desperate.

[Starglider]

The idea being that all corporate (and for that matter, personal) transfers of funds out of the country for reasons of sheltering it from our regulators results in something ridiculous like 90% of it being seized at the border.

'For reasons of sheltering it from our regulators' is far too vague to be enforceable, even in principle. That's on top of the fact that recent events have demonstrated how US regulators are both incapable of and unwilling to penetrate the labyrinthine complexity of modern large multinational accounting practices.

[ShadowDragon8685]

The idea being that all corporate (and for that matter, personal) transfers of funds out of the country for reasons of sheltering it from our regulators results in something ridiculous like 90% of it being seized at the border.

'For reasons of sheltering it from our regulators' is far too vague to be enforceable, even in principle. That's on top of the fact that recent events have demonstrated how US regulators are both incapable of and unwilling to penetrate the labyrinthine complexity of modern large multinational accounting practices.

I didn't say it was worth putting into law in those terms, and of course the problem that our regulators don't regulate jack or shit is a problem, though a separate, exacerbating one.

[JME2]

Or, to put it another way - it seems quite a few businesses have discovered they can get by without hiring more people, so they don't. Why would they hire labor they don't need regardless of what their cash reserves are? Businesses are not charities, they don't exist to give people jobs, they exist to make profits. Sometimes making profit results in jobs for people, sometimes it doesn't.

True. But there is a danger in the current craze of downsizing and forcing more tasks upon fewer people. It's creating a lot of long-term resentment and anger among employees. I personally know a couple of people in San Francisco who are ready to jump ship the moment a new job opportunity opens because they're sick of being overworked.

I'm not saying that businesses should be charities, I'm just outlining a flaw.

[Knife]

Or, to put it another way - it seems quite a few businesses have discovered they can get by without hiring more people, so they don't. Why would they hire labor they don't need regardless of what their cash reserves are? Businesses are not charities, they don't exist to give people jobs, they exist to make profits. Sometimes making profit results in jobs for people, sometimes it doesn't.

True. But there is a danger in the current craze of downsizing and forcing more tasks upon fewer people. It's creating a lot of long-term resentment and anger among employees. I personally know a couple of people in San Francisco who are ready to jump ship the moment a new job opportunity opens because they're sick of being overworked.

I'm not saying that businesses should be charities, I'm just outlining a flaw.

Indeed, it breeds resentment when the worker has to do twice or more the work for the same pay, or even with less pay, and the head shed continues to get bonuses and full pay and hours. How about something akin to 'if I have to tighten my belt, so do you'?

[Simon_Jester]

If you put a tax on USD bank / money market holdings, they'll just transfer that money into overseas accounts or non-cash asset classes. Also dispose of it as executive bonuses and (maybe) dividends. In any case you'd have to make the tax pretty severe to significantly move the risk analysis for capacity expansion in a flat or declining market. Doing that has the same problem as raising normal corporation taxes; companies will relocate to cheaper countries, probably offshore tax havens.

Crap, you're right. Never mind, it was a bad idea anyway.

[J]

Oh, and this. They may have record "cash" but companies are also running record liabilities. Not a good thing.

Marketwatch link

The biggest lie about U.S. companies
Commentary: Healthy balance sheets? They owe $7.2 trillion, the most ever

By Brett Arends
BOSTON -- You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they've paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.

You could hear this great news pretty much anywhere -- maybe from Bloomberg, which this spring hailed the "surprising strength" of corporate balance sheets. Or perhaps in the Washington Post, where Fareed Zakaria reported that top companies "have accumulated an astonishing $1.8 trillion of cash," leaving them in the best shape, by some measures, "in almost half a century."

Or you heard it from Dallas Federal Reserve President Richard Fisher, who recently said companies were "hoarding cash" but were afraid to start investing. Or on CNBC, where experts have been debating what these corporations are going to do with all their surplus loot. Will they raise dividends? Buy back shares? Launch a new wave of mergers and acquisitions?

It all sounds wonderful for investors and the U.S. economy. There's just one problem: It's a crock.

American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression.

You'd think someone might have noticed something amiss. After all, we were simultaneously being told that companies (a) had more money than they know what to do with; (b) had even more money coming in due to a surge in profits; yet (c) they have been out in the bond market borrowing as fast as they can.

Does that sound a little odd to you?

A look at the facts shows that companies only have "record amounts of cash" in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don't look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?

According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That's up by $1.1 trillion since the first quarter of 2007; it's twice the level seen in the late 1990s.

The debt repayments made during the financial crisis were brief and minimal: tiny amounts, totaling about $100 billion, in the second and fourth quarters of 2009.

Remember that these are the debts for the nonfinancials -- the part of the economy that's supposed to be in better shape. The banks? Everybody knows half of them are the walking dead.

Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP. That's a postwar record. In 1945, it was just 20%. Even at the credit-bubble peaks in the late 1980s and 2005-06, it was only around 45%.

The Fed data "underline the poor state of the U.S. private sector's balance sheets," reports financial analyst Andrew Smithers, who's also the author of "Wall Street Revalued: Imperfect Markets and Inept Central Bankers," and chairman of Smithers & Co. in London.

"While this is generally recognized for households," he said, "it is often denied with regard to corporations. These denials are without merit and depend on looking at cash assets and ignoring liabilities. Cash assets have risen recently, in response to the fall in inventories, but nonfinancials' corporate debt, whether measured gross or after netting off bank deposits and other interest-bearing assets, is at peak levels."

By Smithers' analysis, net leverage is nearly 50% of corporate net worth, a modern record.

There is one caveat to this, he noted: It focuses on assets and liabilities of companies within the United States. Some U.S. companies are holding net cash overseas. That may brighten the picture a little, but the overall effect is not enormous, and mostly just affects the biggest companies.

That U.S. companies are in worse financial shape than we're being told is clearly bad news for those thinking of investing in U.S. stocks or bonds, as leverage makes investments riskier. Clearly it's bad news for jobs and the economy.

But why is this line being spun about healthy balance sheets? For the same reason we're told other lies, myths and half-truths: Too many people have a vested interest in spinning, and too few have an interest in the actual picture.

Journalists, for example, seek safety in numbers; there's a herd mentality. Once a line starts to get repeated, others just assume it's correct and join in.

Wall Street? It's a hustle. This healthy balance-sheet myth helps sell stocks and bonds. How many bonuses do you think get paid for telling customers the stark facts, and how many get paid for making the sale?

You can also blame our partisan age too. Right now, people on the right have a vested interest in claiming businesses are in healthy shape. That makes the saintly private sector look good, and demonizes President Barack Obama and Big Government for scaring away investment. Vote Republican! Meanwhile, people on the left have an interest in making businesses sound really healthy too: If greedy companies are hoarding cash instead of hiring people, they can cry "Shame on them! Vote Democratic!"

As ever, the truth is someone else's problem and no one's responsibility.

When it comes to the economy, let's just hope the public is too hopped up on painkillers and antidepressants to notice. If they knew what was really going on, there'd be trouble.

[Simon_Jester]

So... where did the money go, then? Did it just vanish into the ether?

[Kanastrous]

I think a lot of it just vanished back into the ether from which it was summoned. I can't guess at a proportion but I suspect that a lot of that $$$ was basically imaginary, to begin with.

[Guardsman Bass]

So... where did the money go, then? Did it just vanish into the ether?

Pretty much. A lot of it was a value amount given to a whole wide variety of financial assets, which shrank considerably when those assets greatly decreased in value.

[Kanastrous]

Did the assets 'decrease in value' or did people simply stop believing in a bunch of illusory value that the assets never had, to start with?

Or is there a meaningful difference...?