With consumers slow to spend, businesses are slow to hire

Profits are up and companies have cash, but executives don't see American consumers opening their wallets for years to come.
Bar chart shows corporations have bounced back but have been slow to hire.
By Neil Irwin
Washington Post Staff Writer
Saturday, August 21, 2010

CHICAGO -- Corporate profits are soaring. Companies are sitting on billions of dollars of cash. And still, they've yet to amp up hiring or make major investments -- the missing ingredients for a strong economic recovery.

Many Democrats say the economy needs more stimulus. Business lobbyists and their Republican allies say it needs less regulation and lower taxes.

But here in the heartland of America, senior executives say neither side's assessment fits.

They blame their profound caution on their view that U.S. consumers are destined to disappoint for many years. As a result, they say, the economy is unlikely to see the kind of almost unbroken prosperity of the quarter-century that preceded the financial crisis.

Across the industrial parks and office towers of the Chicago region, in a more than a dozen interviews, senior executives said they see Americans for years ahead paying down debts incurred during the now-ended credit boom and adjusting spending to match their often-reduced incomes.

"It's a different era," said Daryl Dulaney, chief executive of Siemens Industry, which has 30,000 U.S. employees who make lighting systems for buildings and a wide range of other products. "Our hiring and investment decisions have to be prudent and reflect that."

Executives see little evidence that the economy is slipping back into recession. But they describe a business environment in which sales come in fits and starts and their customers can't predict what they will want to buy in the future.

"In the past, our customers had more long-term vision on what they're going to need," said Bill Larsen, president of Larsen Packaging Products in Glendale Heights, Ill. Now, he said, "they don't know what they're going to need and when they're going to need it."

Larsen's company sells boxes and other packaging materials to all types of companies, so its sales closely reflect overall economic activity. Those sales have been swinging widely from month to month.

When companies decide whether to hire workers or invest, say, in a new factory, this kind of volatility and uncertainty about future conditions makes for a strong disincentive.

During the first half of this year, capital expenditures by business have been a bright spot in the economy, growing at more than a 20 percent annual rate. But executives say little of this reflects expanded capacity. They say firms are spending primarily to replace equipment they had held onto longer than usual last year to conserve cash.

David Casper, who heads commercial banking at Harris Bank, which has more than 300 branches in the Chicago area, estimated that the firm receives three loan applications from businesses looking to replace outdated equipment for every customer seeking to expand productive capacity.

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