Companies pile up cash but remain hesitant to add jobs

[sabra]

Source: WP

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?

The answer to that question has become a political flash point between the White House and big business groups such as the U.S. Chamber of Commerce, which held a jobs summit Wednesday and accused the Obama administration of dumping onerous regulations on businesses. That has created an environment of "uncertainty," which is causing firms to hold back on hiring as the unemployment rate has hovered near 10 percent, the Chamber said.

The White House countered that companies are wary of hiring not because of new regulations but because they're still waiting for consumer demand to return. The administration also claimed credit for 3.5 million jobs created by the stimulus bill from last year.

Read more: http://www.washingtonpost.com/wp-dyn/content/article/2010/07/14/AR2010071405960.html?hpid=topnews

[NJmaverick]

1. I have been pushing this point in discussions about another stimulus

there is the money needed to prime the economic pump, but it's being sat on. My guess is that political motivations are at play

[sabra]

3. that's a plausible theory

Nonfinancial companies are sitting on $1.8 trillion in cash, roughly one-quarter more than at the beginning of the recession I am curious if the Dems lose the house in November, will these companies all of sudden start hiring?

[NJmaverick]

4. They sit on the money for a few months and the GOP gains in November

then they start to spend and the GOP gets the credit

[mopinko]

11. that's my assumption as well

personally, i think a large part of the economic problems we are having right now have been deliberately created by the rich and these huge companies. they were hoping when this started to start a panic that would drive voters to the party of panic and fear. that didn't happen, but i think they continued on, like little kids, taking their ball home.

[wordpix]

23. bingo---and then they have "proof" the "new" Repugs handle the economy well

same as the "old" Repugs but without DimsonCheney at the helm

[DCBob]

5. it is suspicious.. I was thinking the same thing..

The real test will be what they do right after the elections in November. I suspect the flood gates will open.

[Statistical]

7. If you had $1.8 trillion why would spend it for no reason.

simple answer: companies hire people because there is demand.

Companies don't try to create demand. They hire workers to produce goods to satisfy the demand that exists.
Companies are in the profit business not demand creation business.

No demand = no reason to hire, no reason to expand capacity, no reason to update equipment.

Thus company has revenue and less need to spend so they start to accumulate cash.

Without demand that trend will not change. Not everything is a conspiracy theory. In this instance it is in a companies best interest to NOT HIRE thus they don't hire.

[NJmaverick]

8. RD can help spur demand with new and innovative products (see I-Pad)

you can also pay out dividends which puts cash into the pockets of share holders. You can also give employees raises and/or bonuses.

[Statistical]

10. Well it isn't like companies aren't spending ANY money.

Of course R&D is still going on. Companies don't give raises to be fun. They give raises to keep talent and right now with unemployment at 10% that isn't much of an issue.

Many companies will begin raising dividends however right now that cash is a safety net if we get another leg down in the economy.

Interesting you named Apple. Sitting on the most cash as a % of market cap of any company in the S&P 500.

Balance Sheet
Total Cash (mrq): 23.16B
Total Cash Per Share (mrq): 25.45

So even successful companies see little reason in deploying cash right now. Demand overall remains weak. Unless that changes you won't see companies take

[Igel]

13. Yes.

So the question remains, Why keep the cash?

(First I think we'd need actual information--is the cash held equally by large corporations, financial corporations, small corporations, those that produce raw materials or services or consumer/industrial products? If not, what's the actual distribution. Then we'd be able to make some better inferences.)

Well, lack of reason for expanding because of no demand is a good reason for not hiring or expanding. True.

But R&D can continue. In fact, companies with cash have usually laid the groundwork during recessions for an increase in capacity. They buy up other companies; they buy land; they make plans for new equipment, new capacity. They expect to have a good rate of return on their investment if they invest now. They're not doing this so much this time around. They're not investing for the future.

Why not disburse it among shareholders? Well, retained earnings helps increase stock prices. But that doesn't help fend off takeovers. If you have $1 billion in cash you need to be offered more to buy the cash, but you just take out a large loan and repay it at once. So why hold the cash? For the incredible interest rate they're getting? No. If I had lots of cash I'd tend to do what I'm doing now: I'm husbanding my resources because I suspect that I'll be facing hard or harder times ahead. I'm not going to hand out money I that I might need, esp. if it won't make me more money.

So you come back to this: If they're not investing for the present it's because they don't see the demand. If they're not investing for the future, it's because they have no expectations of making any return on their investment or figure they might need the cash.

[KansDem]

16. They can start manufacturing again

For example--

The handle came off an attache case I bought four months ago;
A can opener I bought broke the first time I used it;
The souls came of a pair of house shoes I bought last year after I had them only six months;

Common thread? They were made overseas.

America has the reputation of having a proud, hard-working, educated work force. Companies can create demand by hiring Americans and making quality products...period. Then folks like me won't have to buy crap from foreign companies.

Unless you believe capitalism is best realized by producing crappy products that have to be purchased over and over.

Imagine if I had to buy a new can opener every time I opened a can of beans. It would be a capitalist's dream come true...

[timo]

21. I agree

I have a small tree farm and nursery, I have cut my employees back, we have been very fortunate to have a an increase in business, but with the uncertainty of things, I am sitting on the income, and still being as conservative as possible to stack up some cushion for more bad times....I hate it but self preservation is a must!!

[wordpix]

24. companies COULD do some r&d for a bit of innovation & redo their roofs with solar

but NO, they'd rather sit on cash until the repukes get in again.

[The Magistrate]

15. You Are Quite Right, Sir: Business Leaders Are On Strike Against Our Democratic Administration

[NJmaverick]

17. Yes and I would love to see the administration use your talking point

business on strike against America would be a compelling story.

[wordpix]

25. because we've seen the need to ensure no more Big Oil blowouts or Wall St. bailouts

finish the thought but keep it simple.

[DCBob]

19. Ed is talking about this right now with Sen Harkin on MSNCB

This issue is getting legs.

[Love Bug]

2. They aren't hiring more workers because they don't have to.

They seem to be able to pile up a massive pile of cash by abusing their current workforce. Why hire more workers when you don't need to?

All of their whining about "uncertainty" is just bullshit in an effort to get regulations reduced so they can further abuse their workforce and pile up even more cash.

Am I bitter? You betcha.

[wordpix]

26. +1

[Yavin4]

6. Hoarding Cash Will Make Them Prime Takeover Targets

It will be like the 1980s all over again. Raiders love to target corporations with a huge stockpile of cash which can be used to pay off the costs associated with the acquisition.

[Mopar151]

9. It has to do with "fiduciary duty"

The first obligation of management is to the interests of the shareholders. Generally, this is defined as either shareholder equity or ca$h.
IMHO, we need to change tax laws, accounting rules, and more to change the perception/valuation of a company's worth.

[Zorra]

12. Don't worry. They'll be adding lots of jobs soon!

In India, China, Mexico...anywhere where labor is cheap and sweatshops are legal.

[Javaman]

14. KInd of destroys the whole trickle down theory. nt.

[femrap]

18. Why aren't they hiring?

Well, they don't have to. They're probably looking around for a company to takeover and therefore reduce more competition.

Plus retail sales are down. Who is buying? The rich can only buy so many homes, plans, diamonds, cars, boats, etc.

The Former Middle Class can't afford anything but the necessities. And 40 million Americans are on Food Stamps.

The corporations also don't want to pay for new hire's health care.

One job for every 6 people looking for one.

[jtuck004]

20. Because they might as well write the check to China and close up shop.

They can create jobs, (though why they would in the face of no demand boggles the mind) then workers spend their money, slowly but surely it goes to China, the Saudi's, etc.

Soon all their money is gone and their jobs are as well.

Policies have to change and taxpayers have to demand re-building and restructuring our manufacturing to align with the 21st century. This will have to come from government investment in the country.

[Psephos]

22. No conspiracy theories needed. They are sitting on it because of uncertainty.

No one wants to ramp up until there are solid trends in demand, and those have not materialized yet. Furthermore, it's not clear what financial liabilities new taxes and especially, the new healthcare law, will impose.

Cash is security in a time of deep insecurity. Until uncertainty abates, it's considered an exercise of fiduciary restraint to safeguard capital. If economic or regulatory conditions worsen (especially, the dreaded "double-dip), a capital-conservative policy is considered good business, or even, a survival strategy.