No Hoarding!

Yesterday, as I went through my battery of morning news, I noticed a large number of financial reporting stories coming in, and it looked encouraging. A lot of big companies were posting profits for the latest quarter, and big ones, too. There were a few losers, of course, but thats business. What seemed especially encouraging was that manufacturing was up, and joblessness claims were down. Those are two trends that go better together than chocolate and peanut butter.

So it came as a bit of sobering news when I also came upon a recent Grant Thornton survey of 516 chief financial officers and senior comptrollers that predicted the weak job market would continue for some time and that the CFOs in question werent very optimistic about the economy at all. Some 79% of the respondents surveyed believed the U.S. economy would not recover until at least the second half of 2011, if not later, and 59% of them were worried that we might slip into a double-dip recession. Not surprisingly, 64% said that cutting corporate and individual taxes would create jobs. That said, only 29% said they planned to hire over the next six months.

This information reminded me of a dinner I recently attended with some senior asset managers for the life insurance industry, and I was struck by how they noted that corporate coffers are currently bulging with cash, but uncertainty over how Washington will behave, mainly, was keeping companies from loosening their purse-strings. I can appreciate that. Nobody wants to go on a major spending kick if Congress suddenly lays down a surprise tax on anybody wearing pinstripes. But even more interesting was how these same asset managers noted how there was a several-month lag between corporate spending and job creation. It just takes that long for the money to move through the system.

The Grant Thornton survey said as much, also. These findings are consistent with what we have been hearing from our dynamic organization clients, said Grant Thornton LLP CEO Stephen Chipman. Indecision stemming from a weak economy and the unknown impact of governmental tax policy and new regulation on business and individuals is causing paralysis, particularly as it relates to major business decisions, including expansion, expenditures and hiring.

Heres where I have a problem with this entire set of logic. I get that nobody wants to lay out millions on a business expansion effort that the godless communists in Washington might overturn when they outlaw paper money. But having followed both the healthcare reform efforts and the financial services reform efforts, both of those initiatives took at least half a year each to get completed, and that was all riding off of the wave of enthusiasm that came from Obamas election. Even if the Republicans dont make a clean sweep in midterms in the next few weeks, the truth is, the Democrats simply went through all of their political capital on healthcare reform and financial services reform. Simply implementing those two things will take what little energy they have left for the next two years. And I cannot imagine that any implementation of either package will deviate so far from what Congress passed and Obama signed into law as to constitute entirely new regulation out of whole cloth.

Frankly, if any major effort is likely to make progress at all, it’s the repeal-and-replace effort to overturn Obamacare, and either way, that should encourage business. If Obamacare is overturned, hooray! No trillion-dollar tab to pay for and no new taxes needed to pay for it! If it’s not overturned, hooray! Gridlock in Washington, and a guarantee that nothing more gets done! All we’d need then is for Obama to get re-elected and then canoodle with an intern, and federal paralysis is guaranteed until 2016.

The bottom line? I think these CFOs and senior comptrollers in the Grant Thornton survey, and the many other senior financial officers who agree them, are chicken. A key point made by the asset managers I spoke to was certainty–the notion that the time was right for people to spend. Now, I am no economist (as I am sure at least one reader will point out to me later), but recessions have always struck me as more crises of confidence than anything else. Enough people get the willies that things are turning south, so they hold on to their cash, which encourages more to do so, who hold onto their cash, until the entire thing becomes a weird self-fulfilling prophecy. I also imagine recovery from recession works the same way. Those who build toward a more robust tomorrow encourage others to do likewise.