Companies pile up cash but remain hesitant to add jobs

By: Jia Lynn Yang, The Washington Post

Commentary:

There is some intense debate taking place over the behavior of business and the positions that have been taken by various politicians and analysts are saying far more about the people making the assumptions than it is about the businesses in question. The basic assertion from the Obama White House and the Democratic Party is that business is hoarding money and refusing to add more jobs in favor of keeping profits higher. The Republicans are asserting that business is so confused by all the new regulations that they are paralyzed and incapable of making decisions. As with most things there is an element of truth in both statements. There is indeed a desire to make some profits as soon as possible in order to keep the interest of investors and the quickest way to see that new profit start to erode is to add people. There is a great deal of uncertainty in the business sector today and that does tend to make people cautious until they understand the new rules that have emerged due to health care and bank reform and climate change regulation and so on. It is not that there isn’t uncertainty during most periods but lately there has been more than usual.

There are other factors at work as well and the most important is that there isn’t a whole lot of demand with which to work and until the consumer gets back in the game there isn’t much that the business community can do except wait. They are fully aware that the lack of job growth helps create this lack of demand but there is nothing an individual company is able to do that changes that equation. There is one other factor that has gone largely unnoticed by the powers that be. The financial world has changed substantially – not just because of the reforms that Congress passed. The assumptions that underpinned the financial world and the way that it manages risk were revealed to be flawed in the meltdown and that means that there will be no resumption of business as usual in banking or in the business community. This is ushering in a new ea as far as how business will finance its future growth. There will still be some borrowing and there will still be the occasional merger and acquisition but the name of the game in the future will be organic growth and that means that cash will be king. Companies are expected to hold as much as 30% to 40% more of their profit back than in the past so that they will have the war chest they need when they decide it is time to move. This is simply good business strategy in a period in which banks will play a reduced role.

There is nothing remotely sinister about this and in fact this is the kind of behavior that analysts have been encouraging in the business community. But then there is old adage about the law of unintended consequences. It seems that when companies are behaving responsibly they are less likely to throw money around – on hiring or on much of anything else.

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