U.S. publicly traded companies are rolling in dough, but most of the cash isn’t going anywhere near the broader economy. Until the logjam of demand breaks, that cash is likely to stay mostly where it is.
Close to home.
It’s a bitter irony of the recovery from the worst economic crisis since the Great Depression. Stocks are hitting all-time highs even as the labor market remains weak. The well-off are doing just fine, but for a large swath of the nation, the recession never really ended.
Indeed, some polls show that 80% of people think the U.S. is still in recession even though it was officially declared dead almost five years ago.
That misperception makes a lot of sense when you consider that business in many ways has never been better in part because so many people have been laid off. Indeed, wages are the single-largest corporate cost, so when companies need to pare expenses, the first thing they do is fire employees.
That’s why a stock rallies when a company says it’s canning people. Lower costs mean fatter margins, and fatter margins mean bigger profits — even if revenue is stagnant (more on this in a minute.)
Click to Enlarge The result is that stocks are at all-time highs partly because corporate profits are at record highs, closing in on nearly $1.9 trillion.
At the same time, nearly 9 million jobs were lost in the recession and its aftermath, according to the Bureau of Labor statistics. More than 10 million people are still unemployed today. First-time claims for unemployment insurance routinely top 300,000 a week, and layoffs are still happening at a pace of 1,600 per quarter.
Click to Enlarge Most alarming is that when you use the broadest measure of joblessness — which counts marginally attached workers and part-timers who want full-time work — the unemployment rate stands at 12.7%, according to the BLS.
Add in stagnant wages, and it’s abundantly clear that corporate cash isn’t going to workers, and by extension the wider economy. The rub is that unemployment tamps down demand, and without demand, there’s no reason for companies to invest in their businesses and hire workers.
It’s a vicious cycle: No work means no demand; no demand means no work.
And it’s been this way for years. S&P 500 revenue growth hit just 0.8% in the most recent quarter, according to data from FactSet. Indeed, S&P 500 revenue has been stuck in the very low single digits for years. Publicly traded companies have to show profit growth, quarter after quarter and year after year, and the easiest way to do that is to … anyone? Anyone?
Fire more workers.
Capex Takes a Hit, Too
The lack of demand shows up in investment, too. Companies stopped spending as much to expand their businesses because there was no one to sell stuff to, although that appears to be changing a bit.
Click to Enlarge At its peak in 2008, capital spending hit $1.4 trillion, according to the Census Bureau. It picked up again in 2010 to 2011 (last year for which data are available) but it was still only $1.2 trillion.
In another vicious cycle, a lack of capital spending means more unemployment, since structures and equipment don’t need to get built amid weak demand.
More hopefully, there are indications that capital expenditures are starting to grow significantly again. Companies are using almost 79% of capacity, according to data from the Federal Reserve. When they get close to 80% capacity utilization, that’s when they start to get nervous about needing to add more capacity. It’s like filling your gas tank when it’s four-fifths empty. You’ve got some mileage left, but it’s more important that you not run out of gas.
Still, if all that corporate dough isn’t going to workers or business investment, then just where the heck is it going?