Has corporate America lost its gumption?
Three of the things that have made the United States so great are the determination, fearlessness, and entrepreneurial spirit of our people. Unfortunately, that seems to be a bit lacking right now with the leaders of some of our country’s largest companies.
For more than two years now, corporate America has been on a belt-tightening, cost-cutting push that has helped contribute to our high unemployment rate. While that has been bad for employees, it has sparked a significant revival in corporate profits. For example, according to a New York Times article based on data from the Bureau of Economic Analysis, second quarter corporate profits were within 4% of their pre-recession peak. And, by another measure, Barron’s magazine pointed out that corporate profits as a percentage of gross domestic product are near 40-year highs.
So, if corporate America is doing so well, why aren’t they hiring and why is the stock market stuck in neutral?
In a word -- uncertainty.
Even top Federal Reserve officials are having a hard time agreeing on what to do next to help the economy. On August 10, 17 of them met and, according to an August 24 Wall Street Journal article, at least seven of them spoke against or expressed reservations about the ultimate decision Chairman Bernanke made to keep the Fed’s balance sheet from shrinking. Toss in government regulation, an upcoming mid-term election, tax policy uncertainty, a deflation/inflation debate, and stubbornly high unemployment, and there’s plenty to muddy up the waters.
Corporate America is reacting to this uncertainty by conserving cash and keeping a lid on hiring. However, this will eventually change, and, on a positive note, we may be starting to see that happen as corporate acquisitions are on the rise. The current bidding war between two blue-chip technology companies for an obscure data-storage company may be one example of gumption returning to the boardroom… and that’s good!
According to the August 2010 newsletter from Research Affiliates, LLC, “Developed markets account for 62% of the world’s GDP and owe 90% of the world’s sovereign bond debt. The emerging markets collectively produce 38% of the world’s GDP and owe just 10% of world sovereign bond debt.” In other words, relative to the size of its economies, developed market countries (like the U.S.) have a much higher debt burden.
Over time, as the developed world tries to pare its debt through austerity programs, sluggish growth may result. World leaders are banking on emerging countries like China to help pickup the economic slack. The extent to which these emerging countries can do that may have a big impact on how long the U.S. stays stuck in neutral.
Weekly Focus – Think About It
“Don't waste life in doubts and fears; spend yourself on the work before you, well assured that the right performance of this hour's duties will be the best preparation for the hours and ages that will follow it.”
--Ralph Waldo Emerson
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