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Idle demand results in flat job growth (Photo by Rupert Ganzer on Flickr)

As the country struggles to recover economically, unemployment remains the persistent immovable peg.  The national rate edged back up to 9.8% last month, and remains a burden on individual families as well as the economy as a whole.

The mantra for politicians of all stripes has been “jobs, jobs, jobs”—reflecting at least an agreement on the problem.  The solution presents a less unified stance.  There is no widespread agreement on how to get private industry hiring again.

What is known is that private industry is collectively sitting on $2 trillion in cash.  Further, the stock market is at its highest close since the 2008 meltdown, and all but four of the S&P 500 companies closed in the black this year.   Businesses have made a substantial economic recovery and even turned in record profits in the 3rd quarter of 2010.  So why hasn’t this resulted in more jobs?

One school of thought is that businesses are not growing because demand is flat.  There’s no point in building new widget factories or hiring new widget salespeople if there’s no one clambering to buy new widgets.

The other prevailing wisdom is that businesses are hesitant to invest in new capacity because of uncertainly about the economy.  They fear the national debt may result in new taxes, that healthcare reform will drive up their employment costs, or that onerous regulations will increase their cost of doing business.  Being fiscally prudent, they are holding their cash in reserve, rather than investing it, in order to cover these potential future expenses.

Interestingly, corporate mergers and acquisitions are up 10% in the U.S. this year.  This is the first uptick in this number since 2007, and reflects a desire for companies to invest their cash in something.  Companies have also bought back $273 billion of their own shares this year in an attempt to prop up their share prices.  Again, indicative of a desire to use rather than horde cash.  Additionally, U.S. companies have created 1.4 million jobs overseas this year, while creating less than 1 million here at home.  Many of these overseas jobs were created in growing economies with growing demand such as China and India.  So companies are hiring, but mostly in areas where there is growing demand for their products.

This should dispel any notion that U.S. companies are stockpiling cash for an uncertain economic future.  All indications point to businesses being eager to invest and eager to grow.  They just aren’t eager to grow in markets where demand is flat or falling.

Businesses are making good business decisions, and the data show they are being rewarded for that.  Increased focus on pro-business policies may further increase corporate profits, but show no signs of improving the plight of the American economy and the unemployed.  We need to be careful not to undo the corporate recovery already achieved.  But moving forward, the focus needs to be on priming the demand pump, something that additional business initiatives will not accomplish.

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