Why Aren’t Companies Spending?

The bank books of corporations are ballooning.  According to the Wall Street journal, American companies have more money in their vaults than at any other time in the past 50 years.  Also, interest rates are near historic lows, making it easy to borrow and obtain funding.  So why don’t we see a lot of companies building new plants, hiring more staff, and generally expanding their business.

Once companies start spending again, we should expect the economy (and consequentially the stock market) to grow quickly.  The reasons why they are not are two-fold. 

The first reason is the uncertainty over the economy itself.  After seeing an economy that contracted quickly, companies are justifiably a little reluctant to risk putting capital on the line.   Looking at the numbers, this period was not as bad as the Great Depression (yet), as the news media was suggesting.  If it had been companies would have gone down by 80-90%, with the Dow perhaps falling to 3000 or so, instead of just down to the 8000 range.  Nevertheless, many companies are waiting for signs of life before making investments.  Lately we have seen some good earnings come out and some encouraging signs such as improvements in consumer sentiment, so we may be about to break out of this slump.  The Federal reserve’s easing of interest rates also tends to cause economic expansion.

The second reason is perhaps more worrisome.  That is the uncertainty caused by the unprecedented moves by the Federal Government and the Federal Reserve.  Specific examples include the huge bailout of the banks and autos, the dictates on CEO pay, the large number of new regulations that are expected, uncertainty over tax rates next year, the changing of terms for bond holders in GM, the large expanse into health care, and industry-killing legislation pending such as carbon taxes and card-check. 

In an environment where the government is choosing winners and losers, and changing the rules daily, it becomes very difficult for CEOs to determine where and how to spend money.  If you hire a group of workers and then their cost goes up substantially due to some new health care requirement, you would need to fire those same employees.  If you cannot fire them because of some new regulation, your whole company may go under.  In another example, if you expand aggressively to take market share from one of your competitors, and then the government comes in and provides low-cost funding to them, where is the advantage in trying to take market share.

This second form of uncertainty is more pernicious and may be with us for sometime to come.  Some would argue that the Great Depression dragged on so long because of the endless new regulations and laws passed during that period.  Hopefully we won’t see that again.

For the investor, as always if you have a long time window it is never a bad idea to buy up shares when prices are low. Just realize that nothing exciting may happen for a while and there may be some dips along the way.  Certainly those who bought in the 1930’s would have done very well by 1945 and have been rewarded for their patients.  For those who will need money soon, however, it would be wise to sell stocks and have cash available.  It is never a good idea to have money in the market that will be needed within the next 5-10 years.  One should not need to worry about the stock market when looking to buy a house or retire.

To ask a question, email  vtsioriginal@yahoo.com or leave the question in a comment for this blog.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. In addition the writer of this blog is not an accountant and writings should not be taken as tax advice which should be left to a CPA.  Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Comments appreciated! What are your thoughts? Questions?

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.