Employment scarce, despite large earnings in 2003 that leave businesses awash in cashFebruary 15, 2004
Corporate America must believe it: You can’t be too thin or too rich.
The economy created a net 112,000 jobs in January, well below expectations. It was another in a string of disappointing payroll reports that have pointed up companies’ reluctance to hire, even as business conditions have improved markedly in the past year.
The disconnect here, or at least one of them, is that jobs are in short supply even though the financial wherewithal to create them isn’t. That’s clear from the dramatic turnaround in corporate earnings last year that has left many companies awash in cash.
How much cash? The numbers are stunning on first glance.
Computer chip titan Intel Corp. ended last year with $13.5 billion in cash on its balance sheet, up from about $8 billion two years earlier. Telecom giant SBC Communications Inc. had $4.8 billion in cash at year’s end, compared with $703 million at the end of 2001. Boeing Co. finished the year with a cash hoard of $4.6 billion, compared with $633 million two years ago. Ford Motor Co. is determining the smartest ways to deploy its $25.9 billion in cash.
A company’s checkbook balance is just one factor in any decision about hiring, or spending in general. But it’s certainly a crucial factor.
“The numbers have been extraordinary,” said Richard Rippe, chief economist at Prudential Equity Group in New York, referring to the amount of cash U.S. companies overall have generated in the past year. “Now the question is: What do they do with it?”
Shareholders should be keenly interested in how corporate cash will be spent.
Investors know from experience that cash is a lousy asset now, as short-term interest rates hold at 40-year lows. As the money piles up, while jobs don’t, many economists increasingly are asking whether there’s something about this recovery that is substantially different from past ones: Are companies more cautious about taking risks than they’ve ever been before?
Given the relentless pace of globalization, it may be that many executives have greater competitive concerns than has been true at this stage of previous recoveries. And that may be translating into a stronger reluctance to spend.
Whatever their reasons, many executives say they feel more nervous about taking risks, which is another way of saying they’re afraid to spend money.
A fourth-quarter survey of U.S. chief executives by PricewaterhouseCoopers found that 68 percent believe that the current business environment is making companies risk-averse, the accounting and consulting firm said recently.
Some Wall Street pros say it would be more surprising if executives weren’t cautious, given what they’ve been through in the past few years.
The recession of 2001 wasn’t severe in terms of consumer spending, but it was horrendous for corporate finances: The operating earnings of the blue-chip Standard & Poor’s 500 index companies suffered their deepest plunge in more than 50 years.
Something else may be weighing on corporate spending: Some say the scandal wave that began with Enron Corp.’s collapse in 2001 has fostered a climate of fear in the executive suite — including fear of making an otherwise honest misstep. “We see more and more evidence that ‘reputation risk’ is a huge issue with CEOs,” said Daniel DiFilippo, head of the U.S. governance, risk and compliance practice for PricewaterhouseCoopers.
Many economists say that corporate spending already is on the rise and is sure to accelerate this year.
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