Business cheerleaders emphasize the positive assuming the economy runs on optimism and that if average consumers think the economy is getting better, they’ll empty their wallets more readily and – presto! – the economy will get better. [Unfortunately], these cheerleaders fail to understand that regardless of how people feel, they won’t spend if they don’t have the money – [and they don’t]. Words: 1279
Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Robert Reich’s (www.robertreich.org) original article* for the sake of clarity and brevity to ensure a fast and easy read. Reich goes on to say:
Smoke and Mirrors
The US economy grew at a 5.9 percent annual rate in the fourth quarter of 2009. That sounds good until you realize GDP figures are badly distorted by rising government expenditures such as, for example, health care costs. This is all smoke and mirrors. The stimulus is reaching its peak and will be smaller in months to come and a bigger federal debt eventually has to be repaid.
So when you hear some economists say the current recovery is following the traditional path, don’t believe a word. The path itself is being used to construct the GDP data.
Only the Biggest Companies are Doing Better
Look more closely and the only ones doing better are the people and private-sector institutions at the top. Many of America’s biggest companies are sitting on huge amounts of cash right now, but that says nothing about the health of the U.S. economy. Companies in the Standard&Poor 500 stock index had sales of $2.18 trillion in the fourth quarter, up from $2.02 trillion last year, and their earnings tripled. Why? Mainly because they’re global, and selling into fast-growing markets in places like India, China, and Brazil.
America’s biggest companies are also showing fat profits and productivity gains because they continue to slash payrolls and cut expenditures. Alcoa, for example, had $1.5 billion in cash at the end of last year, double what it had on hand at the end of 2008. Sounds terrific until you realize how it did it. By cutting 28,000 jobs – 32 percent of workforce – and slashed capital expenditures 43 percent.
Firms in S&P 500 are now holding a whopping $932 billion in cash and short-term investments. They can borrow money cheaply. Corporate bond sales are brisk. So far in 2010, big U.S. corporations have issued $195.2 billion of debt, excluding government-guaranteed bonds. Does this spell a recovery? It all depends on what the big companies are doing with all this cash.
In fact, they’re doing two things that don’t help at all:
1. they’re buying other companies. (Walgreen last month spent $618 million for New York drugstore chain Duane Reade; Bank of New York Mellon, $2.3 billion for PNC Financial Services; Monster, $225 million for jobs.com; Diamond Foods, $615 million for Kettle Foods.) This buying doesn’t create new jobs. One of the first things companies do when they buy other companies is fire lots of people who are considered “redundant.” That’s where the so-called merger efficiencies and synergies come from, after all.
2. they’re buying back their own stock, in order to boost their share prices. There were 62 such share buy-backs in February, valued at $40.1 billion. We’re witnessing the biggest share buyback spree since Sept 2008. The major beneficiaries are current shareholders, including top executives, whose pay is linked to share prices. The buy-backs do absolutely nothing for most Americans.
(None of this, by the way, is stopping supply-side fanatics from arguing government needs to cut taxes on big corporations in order to spur the recovery. Their argument is absurd on its face. Big companies don’t know what to do with all their cash they have as it is. They aren’t investing it in new plant and equipment and new jobs so why should the government cut their taxes and enlarge their cash hoards even more?)
Small Companies Not Doing Well
The picture on Main Street is quite the opposite. Small businesses aren’t selling much because:
1. they have to rely on American – rather than foreign – consumers, and Americans still aren’t buying much.
2. 34% find it difficult to get credit.
That’s a problem for most Americans. Small businesses are where the jobs are. In fact, small businesses are responsible for almost all job growth in a typical recovery. So if small businesses are hurting, we’re not going to see much job growth any time soon.
Americans Reducing Debts
Total US household debt, including mortgages and credit card balances, fell 1.7 percent last year – the first drop since the government began recording consumer debt in 1945. Much of the debt-shedding has been through default – consumers simply not repaying and walking away from homes and big-ticket purchases.
This is hardly good news but here’s the Wall Street Journal’s take on it: “the defaults are leaving many people with more cash to spend and save, jump-starting the financial rehabilitiation” of the economy. Baloney! As of end of 2009, debt averaged $43, 874 per American, or about 122 percent of annual disposable income. Most economic analysts think a sustainable debt load is around 100 percent of disposable income – assuming a normal level of employment and normal access to credit. Unemployment is still sky-high and it’s becoming harder for most people to get new mortgages and credit cards and with housing prices still in the doldrums, they can’t refinance their homes or take out new loans on them. The days of homes as ATMs are over.
Some cheerleaders say rising stock prices make consumers feel wealthier and therefore readier to spend but to the extent most Americans have any assets at all their net worth is mostly in their homes, and those homes are still worth less than they were in 2007. The “wealth effect” is relevant mainly to the richest 10 percent of Americans, most of whose net worth is in stocks and bonds. The top 10 percent accounted for about half of total national income in 2007 but they were only about 40 percent of total spending, and a sustainable recovery can’t be based on the top ten percent.
Add to all this the joblessness or fear of it that continues to haunt a large portion of the American population. Add in the trauma of what most of us have been through over the past year and a half. Consider also the extra need to save as tens of millions of boomers see retirement on the horizon. Indeed, thrifty consumers are doing the right and sensible thing by holding back from the malls. They saved a little over 4 percent of their disposable income in fourth quarter of 2009. In the months or years ahead they may save more [which will be the] right and sensible for each household but a disaster for the economy as a whole.
What happens when the stimulus is over and the Fed begins to tighten again? Where will demand come from to get Main Street back, create jobs, raise middle class wages? Not from big businesses. Certainly not from Wall Street. Not from exports. Not from government. So, where? That question is the big unknown hanging over the U.S. economy.
Until there’s an answer, an economic “recovery” for anyone other than big corporations, Wall Street, and the wealthy is a mirage.
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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