Big Spenders: Company Profits Not Translating Into More Workers

July 30, 2010 — -- It's the slowest rate of recovery seen in nearly a year -- the gross domestic product rose just 2.4 percent in the last quarter and that's down from 5 percent growth less than a year ago.

But even as the economic recovery slows down dramatically -- with consumers spending far less and unemployment currently at 9.5 percent -- one group is spending and that's business.

Companies are investing more money in equipment and software than they have in more than a decade. Spending by builders on commercial projects has spiked.

So why isn't that money turning into jobs?

"There's a real mystery going on here because corporate profits have been pretty strong," said Jon Hilsenrath, the chief economics correspondent for the Wall Street Journal. "The problem is they're investing in equipment, not people."

But that doesn't necessarily mean that people are being completely replaced by machines -- just yet.

"There has been a productivity boom, which has surprised a lot of people, because you usually see a productivity slowdown. ... We are seeing machines doing more but we're seeing businesses asking people to get more out of the machines surrounding them," he said.

Part of the reason: During the recession, businesses and corporate America learned how to do more with less and asked employed U.S. workers to produce more.

"They had no choice," said Mark Zandi, chief economist for Moody's Analytics. "When things were bad, they made those cuts and are now able to produce a lot more with fewer people."

Because of that, some of these leaner and meaner companies are producing huge profits.

Three-quarters of the companies in the Standard & Poor's Register of Corporations that have reported earnings have beat the earnings estimates.

"Businesses are in fact sitting on a large pile of cash, a record amount of cash," Zandi said. "They've been profitable and they're hoarding that cash."

For example, heavy equipment manufacturer Caterpillar's profits are up 91 percent over last year, earning $707 million last quarter. DuPont's profits are up 277 percent over last year, earning more than $1 billion in three months. And Microsoft's profits are up 49 percent over last year, earning nearly $6 billion between April and June.

All three companies were called but only Caterpillar offered hard numbers.

Economic Boom: Caterpillar Responds

"We've hired about 3,650 employees to date in the last half of this year," a representative said. She said that number could reach 9,000.

She said of the 9,000, about a third would be in the U.S. The rest would be overseas because "that's where the customer is," she said.

In total, the three companies have more than $40 billion just sitting on the sidelines.

"The positive scenario is that eventually executives are going to get enough confidence in this recovery that they're going to start hiring people too. But right now, they're holding back. They're keeping their tinder dry," Hilsenrath said.

He said businesses have to become confident that consumers will spend money. "We haven't seen a very big rebound in consumer spending," Hilsenrath said.

"No business person wants to go out and hire a new person unless they are absolutely sure if they make that hire, they will be able to sell what that person is going to produce," Zandi said.

Yet there is still at least one wild card to watch out for, said Hilsenrath: the rest of the world.

"Exports have started to come back. Global demand is pretty strong. The emerging markets are rebounding a lot more vigorously than the U.S. is. One positive scenario is that we get an export-led recovery and that leads to hiring."

Zandi points to the auto industry. "Automakers have gone from laying off hundreds of thousands of people to hiring tens of thousands of people and I would anticipate that we would see more job growth in that sector because of increasing global trade."

"There's only so much you can push your work force. ... If you want to continue to maintain that demand and you want to maintain that customer service then you're going to have to go out and hire more people," Zandi said.