Companies pile up cash
but remain hesitant to add jobs
By Jia Lynn Yang
Washington Post Staff Writer
Thursday,
July 15, 2010; A01
Corporate America is hoarding a massive pile of cash. It just doesn't want to
spend it hiring anyone.
Nonfinancial companies are sitting on $1.8 trillion in cash, roughly
one-quarter more than at the beginning of the recession. And as several major
firms report impressive earnings this week, the money continues to flow into
firms' coffers.
Yet all the good news from big business hasn't translated into much promise
for jobless Americans, leading many to wonder: If corporations are sitting on so
much money, why aren't they hiring more workers?
The answer to that question has become a political flash point between the
White House and big business groups such as the U.S. Chamber of Commerce, which
held a jobs summit Wednesday and accused the Obama administration of dumping
onerous regulations on businesses. That has created an environment of
"uncertainty," which is causing firms to hold back on hiring as the unemployment
rate has hovered near 10 percent, the Chamber said.
The White House countered that companies are wary of hiring not because of
new regulations but because they're still waiting for consumer demand to return.
The administration also claimed credit for 3.5 million jobs created by the
stimulus bill from last year.
The acrimony over jobs comes at a particularly tense moment in the
relationship between business groups and the White House. With the midterm
elections looming and polls showing Americans expressing a lack of confidence in
President Obama's handling of the economy, White House officials are eager to
demonstrate that their policies are helping, not hurting, the prospects for job
growth and are making an extra effort to reach out to industry leaders.
For the Chamber's jobs event, the White House said it asked for a speaking
slot for senior adviser Valerie Jarrett, who acts as a liaison to the business
community, but the Chamber turned down the request. Chamber officials said
Jarrett's office called Tuesday afternoon, the day before the conference, and
demanded a speaking slot immediately after remarks from Chamber chief executive
Tom Donohue. The White House said that it did not ask for a specific slot.
"There are going to be areas where we differ, but we do have different
roles," Jarrett said in an interview. "Our job is to both protect the American
people and foster a climate where companies invest and create jobs. Their role
is to produce profits for their shareholders."
White House officials also choreographed a competing set of images for Obama
on Wednesday, having him meet separately with famed investor Warren Buffett and,
later, with Bill Clinton as well as the chief executives of Bank of America and
Honeywell. Obama aides said the business meetings were a coincidence and had
been scheduled before they knew of the Chamber event. They said the meeting with
Buffett had been in the works for a long time. (Buffett is a director with The
Washington Post Co.)
The question of how to encourage companies to hire has challenged
policymakers.
A survey last month of more than 1,000 chief financial officers by Duke
University and CFO magazine showed that nearly 60 percent of those executives
don't expect to bring their employment back to pre-recession levels until 2012
or later -- even though they're projecting a 12 percent rise in earnings and a 9
percent boost in capital spending over the next year.
When asked why companies are holding back so much, many economists cite
broader uncertainty that goes well beyond anything happening in Washington.
Firms aren't sure whether the economy can sustain a strong recovery. And as long
as consumer spending remains low, there's not much incentive for companies to
ramp up.
The trend of companies holding more cash is not new. Between 1980 and 2006,
the average cash-to-assets ratio for U.S. industrial firms more than doubled,
according to research by finance professors.
One explanation, said finance professor René Stulz at Ohio State University,
is that as competition has become more global, it's become harder for individual
companies to survive, and so they hold on to more cash to be safe. He added that
companies have also increased their cash holdings in the wake of the financial
crisis, particularly since the bankruptcy of Lehman Brothers in September 2008,
as the banking system has become more fragile and credit has become scarce.
Tech companies in particular tend to build large cash reserves. Intel, which
reported on Tuesday its biggest quarterly profit in a decade, brought aboard 400
new employees worldwide in the last quarter, though it would not identify in
which countries the hirings took place. Intel spokeswoman Lisa Malloy added that
the firm expects to spend more money, from $4.5 billion last year to $5.2
billion this year, investing in capital projects around the world.
And yet the firm has $1.7 billion more in cash than it had a year ago. Intel
said it is enjoying strong demand for its chips, so low demand doesn't help
explain the firm's mountain of cash.
Alcoa, which reported strong earnings Monday, said it had $493 million more
in cash this quarter compared with a year earlier. Spokesman Kevin Lowery said
the company plans to keep its head count steady.
Some analysts said it may be hard to create policy that compels companies to
use some of their cash to hire workers. "CEOs don't like taking risks. They kind
of move in packs," said Zachary Karabell, president of River Twice Research.
"There's not a whole lot that you could do to entice companies to hire," he
added. "You could cut taxes on them, but they're not going to hire just because
they have the extra cash, because they already have the extra cash."
Staff writer Michael D. Shear contributed to this report.
© 2010 The
Washington Post Company