I read several articles today about the economy. The first of these articles was about the middle class being on the verge of extinction in America.(You can see the article here.) I was struck by one of the statistics quoted in the article. In light of the crisis period we are living through it got me thinking about the average American.
It is a sad truth but many individuals these days have no idea how to handle their own finances, as best exemplified by the SNL skit that you can find here. Of course, it is not all their fault as societal shifts have moved the financial bar away from its commonsense base. As a society we have spent the past 30 plus years keeping up with the Jones’, even going in to debt to do it.
Since the early 1980’s for reasons beyond the scope of today’s blog post we have had rising markets which led to a decline in savings and people living beyond their means without even realizing it. Individuals looked at rising markets of all kinds and figured why save when our assets, be they stocks or houses, will essentially perform that function for us. The aforementioned combination of increasing spending and decreasing savings has fostered for many people a situation of being one paycheck away from disaster since the economy has spiraled down and the old paradigm of savings through asset growth no longer functions. In fact the article points out, ”61 percent of Americans "always or usually" live paycheck to paycheck, which was up from 49 percent in 2008 and 43 percent in 2007”. If almost 2/3’s of all Americans truly fall in to that category then it indicates to me that we have strayed from our core values that made America the economic powerhouse of the past.
There are many articles all over the internet that talk about how the consumer is 70% of the economy and that is a symptom of the societal shift I mentioned earlier. This type of societal shift away from our core values of thrift and savings was best exemplified during the recession in the early 2000’s when then Dallas Fed President, Robert Mc Teer, said "If we all join hands together and buy a new SUV (Sports Utility Vehicle) all will be well" and then he added at the end of this speech to business leaders a call to goose the economy and avert recession: "go out and buy something".
There are no good historical examples of economies that prospered over the long run while spending themselves deeper in to debt and gutting their producer base. I am aware of the globalist arguments for producing items in the market with the cheapest labor cost, however , the long run sustainability of such a model is questionable, at best it is a ponzi scheme. Moreover, as fuel prices increase it will more than offset the savings of labor in foreign markets (which ultimately shifts some manufacturing to the US). So if the consumer is 70% of GDP and they are living paycheck to paycheck it is only to be expected that the GDP will contract further especially if more people are laid off and unemployment benefits run out.
The next article I perused was in USA Today(7/28/2010) with the headline, “Companies hold record $837B in cash, yet won’t hire workers”. A situation like the headline suggests does not portend well for the economy since GDP growth is 70% driven by consumers who are not being hired. The article further states, that the cash being hoarded by companies is enough to pay 2.4 million people $70K for 5 years, which is the kind of linear thinking that gets headlines but is not based in fact. The article fails to mention that 2.4 million jobs could not be created because while on a straight numbers basis the math works, however, the author doesn’t include taxes(those pesky things), employee benefits, and other costs borne by the employer. The article then goes on to say ,“Rather than investing in their future, companies are piling up cash and collecting practically zero interest on the money, hoping there will be a better time to invest later.” Additionally, to take it one step further the author quotes another opinion, “"Reducing costs is a one-trick pony," says” George Christy, principal of financial advisory firm Oakdale Advisors and author of Free Cash Flow. "You can only hold down headcount so much without hurting the quality of your products." Yet another quote goes on to say “Once companies get more comfortable about the economy's future, the hoarding mentality might ease a bit, Kahle says. "Cash can't increase indefinitely. If cash is 100% of assets, then firms aren't doing anything."
While there is merit to all the arguments presented, the real reason that companies are not hiring is due to uncertainty, which is what permeates today’s business environment. I would argue that business is not looking at keeping headcount down as a way to further contain costs, but rather they do not they do not see the need to ramp up production as a result of the macro environment and the fact that they can satisfy demand with the current level of workforce. Rather than expand their permanent workforce business has opted to bring in temp workers which gives them flexibility until there is real staying power in the economy. The temp worker allows business to meet incremental demand with none of the downside of a full time worker at least from a tax and benefit perspective. Why spend the cash when what you see coming is anemic growth, higher taxes and more government regulation. Another plausible alternative is that these high levels of cash will be used to bolster these companies’ growth via share buybacks or M&A activity. This would have the effect of reducing the levels of cash and increasing EPS or growing market share via acquisition instead of hiring. In fact it could ironically lead to further reductions in workforce as duplication is trimmed or competition is cut.
The current situation is not stable from a business perspective; you have rising taxes and continual encroachment by government in to every manner of business. As a former small business man I can unequivocally state that until I could figure out what all the new taxes and regulations mean to my bottom line I would not be expanding my workforce either, especially given the demand outlook and the continual stream of new and proposed regulations and taxes.
The combination of uncertainty and a society that lacks savings to restart the economy leads one to deduce that all the recovery talk is far from baked in the cake and unfortunately there is much more work to be done.