Hoarding, Not Hiring – Corporations Stockpile Mountain of Cash

Reluctant to spend, U.S. companies are sitting on a record $1.6T.

March 31, 2010, 12:00 PM

April 1, 2010 — -- Hopes are running high that Friday's jobs data will bring happy news.

Economists predict the Labor Department will announce that 190,000 jobs were added in March, according to a Reuters poll. If true, it would be only the second monthly payroll gain since the recession began in 2007. The forecast is especially optimistic, considering that ADP Employer Services reported Wednesday that U.S. companies had slashed a surprisingly high 23,000 positions in March.

But even if labor's numbers turn out positive, Wilton, Conn., resident Sean Byrnes won't pay it much attention.

About a month ago, the 41-year-old father of four lost his job as a salesman at a Manhattan-based financial research firm. He has struggled to find so much as even a job interview since then.

"I talk to headhunters and they say the same thing," he says. "No one is hiring."

One piece of economic data that has caught the attention of Byrnes, and others in his predicament, is a fairly staggering figure that comes out of the Bureau of Economic Analysis: Despite widespread unemployment, the BEA reports that U.S. corporations, reluctant to expand in an uncertain economy, are sitting on $1.6 trillion in cash reserves, a record amount, according to BEA economist Greg Key.

Even looking at the companies in the Standard & Poor's 500 index of blue chips -- and stripping out financials, which are required by regulators to keep large cash reserves in order to cushion against risk -- the cash on hand number is still rather monstrous: $1.1 trillion. To put that in perspective, as a percentage of companies' total market capitalization, that $1.1 trillion is more than double the ratio seen before the crisis.

"Cash is piling up faster than companies can figure out what to do with it," said David Bianco, head of U.S. equity strategy at Bank of America.

Asked about the mountain of corporate money sitting on the sidelines, the out-of-work Byrnes offered his own suggestion for what to do with it.

"Companies should absolutely spend some of that money to put people back to work," Byrnes said by telephone earlier this week, clearly frustrated. "I suppose they need to make shareholders happy, but come on already."

Companies Not Spending Cash on New Hires

Actually, according to Bianco, shareholders will soon start to demand that cordoned off cash be put to work, either through some form of growth initiative or at the very least used to pay out a higher dividend. In either case, it's not expected that the cash being hoarded will at any point translate into rapid hiring.

"Companies slashed their work forces and now find that they could function far more resourcefully than they ever realized possible," Bianco said. "If anything, we could start to see some of the money being used to expand overseas or to acquire other companies. In either case, that does not bode well for job creation. In fact, mergers lead to job reductions unfortunately."

Bianco expects 9 percent-plus unemployment to persist though the end of next year. In other words, if there is a recovery it will be slight and a jobless one, as many have feared.

The government, meanwhile, is working hard to spur hiring.

Alan Krueger, assistant secretary for economic policy at the US Department of the Treasury, points out that President Obama recently signed a jobs creation act known as HIRE which includes a variety of incentives. HIRE, for example, exempts companies from paying social security payroll tax if they hire someone who has been out of work for more than two months, and offers them a $1000 cash bonus if they retain the worker for a full year.

He adds that the administration has also been focused on stabilizing financial markets and fuelling consumer demand, two measures which in the long run should start boosting the need for workers.

"We've been trying to set conditions so companies can feel more confident to expand," says Krueger, pointing to efforts such as the Financial Stability Plan and the American Recovery and Reinvestment Act. "As companies become more confident that markets have stabilized, they will be more willing to take risks and invest their cash reserves."

Hiring to Make Money

Regardless of how many hiring incentives the government passes, experts say the jobs market faces a long, tough recovery. Companies simply won't begin to hire workers unless they see a valid business reason to do so. As long as the economic outlook remains cloudy, employers will continue to hold on to their reserves, predicts Rene Stulz, a finance professor at Ohio State University and an expert in cash reserves.

"It makes sense to put cash [...] in hiring people if you can make money. It doesn't make sense to take the cash and hire people if you're going to make losses," he said.

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