Despite stock volatility, executives moving ahead with growth plans — for now
By Neil Irwin,
Washington policymakers are entering a crucial period for the nation’s stalling economy, starting with President Obama’s address to Congress about jobs on Thursday, but the fate of the recovery ultimately depends on decisions being made elsewhere: inside corporate America.
So far, business leaders have been standing firm, with senior executives making few revisions in the plans they had drawn up for expansion and hiring, according to interviews and a review of more than three dozen recent conference calls that executives have held with financial analysts. Even the wild swings on Wall Street during this cruel summer have not knocked executives off track.
But while companies are not undertaking new rounds of layoffs, hiring does not seem poised to take off. Executives speak of the same sluggish but steady job creation that has been underway for months continuing through the end of the year.
The cautious approach taken inside executive suites was also reflected in the grim jobs report from the Labor Department on Friday. While it showed that the nation’s job creation had ground to a halt in August, the private sector continued adding jobs slowly. After adjusting for workers on strike, mostly at Verizon, and employment cuts by government, the report revealed that private employers added the modest net sum of 62,000 jobs.
That result was consistent with the reflections of top executives, such Ronald L. Sargent, the chief executive of office-supply retailer Staples.
“I’m not an economist at all,” Sargent said in a conference call in mid-August with analysts to discuss quarterly earnings. “But from what I see, we have no chance at another recession. I think we’re probably more likely to stay in economic purgatory for a while longer, but I don’t have any worries about a double dip at this point.”
The Washington Post reviewed the transcripts of earnings calls held in recent weeks by more than three dozen large companies to see what executives have been saying about the economy and the plans for their businesses. The transcripts were compiled by Bloomberg’s financial information service in a product it calls the Orange Book. The assessments of other executives were solicited during separate interviews.
While companies are pressing forward, interviews and conference calls show that anxiety is running high in executive suites, and it wouldn’t take much more bad economic news to make businesses rethink their plans for investment and hiring — perhaps dealing a fateful blow to the economic recovery.
The behavior of the corporate sector has huge stakes for the nation’s economic future, and in particular whether the nation falls back into recession.
For one, the government is largely out of ammunition to combat a faltering economy. Although Obama’s speech Thursday night will mark a rare appearance before a joint session of Congress, he has limited options for creating jobs. He faces strong opposition from Republican lawmakers over new federal spending to stimulate the economy, and the government’s outsize deficit also constrains how much the administration can do.
At the same time, the Federal Reserve — which is scheduled to debate its policies at a meeting later this month — has few good alternatives. Interest rates are already near zero, and there is a vigorous dispute on its policymaking board over whether another round of massive bond buying, aiming to pump money into the economy, would have much effect.
So with households still trying to pay down the tremendous debts accumulated during the run-up to the financial crisis, it is cash-rich companies that are the best hope for growth.
Executives offer little reason to expect that businesses are preparing to ramp up their hiring and investment in a major way. But the comments of top business decision makers suggest that the recent wave of uncertainty in the markets — which is also reflected in some surveys of the economy — is not driving firms to cancel plans.
“What happens on markets doesn’t impact me directly day to day,” said Michael Alter, chief executive of Alter Group, a Skokie, Ill., firm that builds office and industrial buildings across the country. “You have to sift through to figure out what’s material and will have a long-term impact and what’s just Wall Street doing what they do. So far, what’s going on now doesn’t seem to be having an immediate impact.”
Alter is continuing to move forward with two medical office buildings, with groundbreaking set to take place in the next 60 days. Negotiations over several lease deals have continued during the recent turbulence without any signs of tenants pulling back from taking on more space.
“If things were really continuing to dive, people on those deals may have said, ‘Whoa, I’m not sure I want to do this right now,’ ” Alter said.
Businesses have been a stalwart of the expansion, with investment in equipment and software rising at more than an 8 percent pace in the first half of 2011, even as overall growth limped among at a 0.7 percent rate of growth. Companies are sitting on large stockpiles of cash, so if they choose to keep growing — if they don’t panic in the face of new threats to the recovery — overall growth has a good chance of holding up.
Economic data over the past few weeks have given conflicting signals. Until Friday, reports on employment, industrial output and consumer spending were holding up. But those reports concern economic activity that’s already taken place and are an imperfect indication of what lies ahead.
There’s more reason for worry in the latest surveys of business conditions, including from regional Federal Reserve banks in Richmond, Philadelphia and Dallas. Those survey measures of the economy are not always reliable — and might reflect a temporary loss of confidence amid startling ups and downs in the stock market at the beginning of August — but are sharply negative.
Among the corporate set, the stock market is not viewed as the same thing as the economy. Almost every recession is preceded by a decline in stock prices, but only a small portion of stock market declines precede a recession. And there’s little doubt that the market declines have added to worry for businesses.
“The havoc we’ve seen in the financial markets over the last few weeks have added further elements of uncertainty,” Sam Allen, the chief executive of Deere & Co., said in an analyst call. But that came as the giant farm equipment company boosted its projections for 2011 sales and earnings and said that “we remain confident that these positive macroeconomic trends have staying power.”
A business that quickly adjusted to every fluctuation on Wall Street would not do very well over time. With that in mind, many executives seem to be viewing the latest bout of volatility as one of those false signals.
“We think long term, and our customers think long term, so these short-term glitches don’t matter that much,” said Rolf Meyer, chief executive of Harting North America, which makes industrial connectors. “We’re expanding our capacity and need new equipment for some of the jobs we’re working on,” he added.
The company, with about 120 employees, has been planning to add another five or six by the end of the year and six or seven more in early 2012 — plans that have not shifted with the latest volatility.
Decisions by businesses have huge consequences for the job market, and here, too, the evidence is that there has been no abrupt worsening in executives’ attitudes toward hiring. The number of people filing new claims for unemployment insurance benefits edged up last week, for example, to 417,000, but is still below the level it was in mid-July.
Part of the reason the job market might be holding up despite recent signs of trouble: Companies cut back so much during the recession — and have built back their staffs so slowly and reluctantly — that they have little room to cut back further so long as demand for their products remains.
In other words, where in 2009 companies could slash jobs and ask employees to work longer and harder, now they are encountering the limits of that practice.
“Companies have gotten to the point where they don’t have the capacity to do a new project with their existing staff, so they have to look outside,” said Janette Marx, a senior vice president with the giant staffing firm Adecco Group. The division she runs provides workers in finance-related fields, and she said demand for workers has been rising in recent weeks after a lull early in the summer.
“We’re starting to see more hiring as opposed to stretching, where in the past when people left the company they were stretching more,” Marx said.