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?
Well, plenty of it is sitting in corporate coffers.
Non-financial companies are sitting on more than $1.9 trillion in liquid assets — roughly equivalent to the GDP of Mexico with 120 million people. True, a lot of that is in Treasurys or commercial paper (cash equivalents), but it still counts as money not being deployed in something tangible and useful that would boost hiring.
Click to Enlarge Strip out all the assets that aren’t actual hard currency — that is, checkable deposits and currency (the kind of cash you hold in your wallet) — and non-financial companies had a hoard of $432 billion, up from $383 billion in the previous quarter. That’s yet another (dubious) record.
In 2009, this figure stood at $155 billion. Looked at that way, corporate coffers have expanded by a quarter of a trillion dollars since the crisis ended. That’s more than the market capitalization of Walmart (WMT), which employs more than 2 million full-time people. (Not well, mind you, but still.) That’s a huge chunk of money that’s not going into investment, expansion and hiring.
More incredible is the amount of dry powder corporations are sitting on that’s available for investment.
Click to Enlarge According to the BEA’s definition and accounting criteria, corporate funds available for investment come down to net cash flow with inventory valuation adjustment. (Don’t ask.) Anyway, looked at that way, funds are sitting above $2 trillion. That’s off from a recent record, but still insanely high compared with previous years.
Tech companies have especially large piggy banks. Apple (AAPL) has more than $40 billion in cash, cash equivalents and short-term investments on its books. Oracle (ORCL) has $37 billion. Google (GOOG) has almost $60 billion.
Consider that the Congressional Budget Office says 2009’s $800 billion stimulus package increased the number of people employed by between 1.4 million and 3.3 million. It’s hardly a perfect comparison, but that $2 trillion available for investment and hiring would essentially give almost all of the nation’s 10 million unemployed a job.
But the demand is not there. So rather than hire or invest, companies are sharing some of that wealth with shareholders through dividends and share repurchase programs.
And then there are buybacks.
Announced share buybacks are also at a record high, while actual share repurchases are at their highest level since 2008. For the most recent quarter, buybacks grew 32% year-over-year to hit $123.9 billion, according to FactSet. For the trailing 12 months, the money disbursed on buybacks amounted to nearly $450 billion.
Companies with the largest buybacks in the third quarter (the most recent data available) reads like a list of companies that could make a dent in joblessness if there were only more demand. Apple spent $5 billion. Pfizer (PFE) shelled out $3.8 billion. Halliburton (HAL) and Qualcomm (QCOM) each spent $3.3 billion. Oracle paid $3 billion to buy back its own stock.
Taken together, U.S. companies spent almost $1.5 trillion on dividends and buybacks over the last year.
There’s plenty of wealth for everyone; it’s just that it’s sitting in corporate treasuries, waiting to be lavished on restive stockholders.
And until demand returns to stress capacity and inflate corporate revenue, companies have no incentive to do anything else with that cash, which, in a way, is their own undoing.
After all, one company’s employees are another company’s customers … so with so many customers out of work or strapped for cash, where is that demand supposed to come from?
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As of the writing, Dan Burrows did not hold a position in any of the aforementioned securities.