By Neil Irwin
Washington Post Staff Writer
Saturday, August 21, 2010; A01
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.
"These decisions are not being made lightly," he said. "We're not in normal times yet."Small-scale investments
From his office in a leafy office park in suburban Lake Forest, Ill., Robert W. Crawford Jr. is one of the executives making such tough decisions. He founded Brook Furniture Rental in 1979 to rent sofas, dining room tables and such, mostly to executives on a temporary assignment. The firm now has 500 employees in seven markets.
At first glance, Crawford, 71, appears to be on an expansion binge; his company has roughly doubled its purchases of furniture this year. But that's not because of any grand expectations for the future. Instead, he's making up for last year, when the company cut furniture purchases 40 percent and ran down its inventory. The large spending bump this year is meant mainly to get inventory back up to normal levels.
And like the corporate sector as a whole, when Crawford gives the green light to an investment, it's usually designed to lower the need for labor. Instead of expanding capacity, such as building a bigger distribution center and having to hire more workers to fill it, he is looking to serve existing customers more efficiently.
That means, for example, small-scale investments in software and new packing procedures so that furniture-delivery crews spend less time in traffic and can get seven or eight stops done in a day, compared with five or six before. He has thus reduced staffing this year despite an increase in business.
"Every investment decision we make is more careful and methodical than it was just a few years ago," said the gravelly-voiced Crawford. "Now we go in smaller, and take time to build out capacity. We're being much more precise and conservative about growth."
By contrast, for most of the 31 years he has been in business, it has paid to be bold. As across corporate America, risk-taking was rewarded. Those who bet on growth to justify hiring more workers and buying more machinery often profited at the expense of more timid competitors.
But executives now project more gradual economic growth and are making less ambitious investment decisions. At Brook Furniture, that means entering new markets with a 20,000-square-foot distribution center, rather than one three times that size as before.
"We're not taking it for granted that growth will be there," said Crawford.Unhappy with Obama
What role is government policy playing in fostering corporate caution?
The executive class in the Chicago region is none too pleased with many of the policies of President Obama, their former hometown senator. They criticize his willingness to let Bush-era tax cuts expire at year's end for households that make over $250,000 and allow the capital gains tax rate to increase. They dislike aspects of his landmark health-care law, and some fear that the financial overhaul legislation enacted this summer will make it harder for them to get loans.
"Congress has been very tough on businesses," said Jason Speer, chief executive of Quality Float Works of Schaumburg, Ill., which makes the industrial equivalent of toilet ball floats, items that sell for up to $1,200 and are used to measure water levels in farm and industrial equipment. The company also makes the metal balls that go on the top of flagpoles.
Fundamentally, executives objected to Obama's policies on the grounds they would make the United States a less competitive place to operate in the long run.
But when Speer and other executives were pressed on the role that tax and regulatory policies play in hiring, they drew only vague connections. Speer said his decision whether to hire is driven primarily by demand for his products. Orders are coming in strong enough that he is running about 20 hours a week of overtime. So he is weighing whether to hire two or three additional manufacturing workers.
None of the executives interviewed linked a specific new government initiative with a specific decision to refrain from hiring.Sustainable growth?
Democratic leaders, however, have been arguing that additional government spending could further stimulate the economy, protecting jobs and perhaps even prompting new hiring. Some economists, meantime, have urged the Federal Reserve to goose the recovery by embarking on an aggressive new effort to pump money into the economy.
But Illinois Tool Works in Glenview shows why more government action might offer limited help.
David Speer (no relation to Jason) is chief executive of the company, which has 60,000 employees worldwide in more than 800 business units and $14 billion in sales. He said an additional burst of fiscal stimulus from Washington might help boost economic growth for a period of months. But that is unlikely to affect his decisions about hiring and expansion, which Speer said are based on expectations for sales over years to come, not just the immediate future. As long as U.S. consumers remain deeply strained, he is unlikely to undertake aggressive expansion.
More fiscal stimulus "might help make things a little better for a couple of quarters, but I'm not sure it would get at the underlying economic issue," Speer said. "The core question is: How do you get consumers back on their feet. We need growth in a sustainable way, not another Band-Aid."
Nor is it clear that new Fed action, such as steps to try to lower long-term interest rates and encourage investment, would prompt him to expand.
For large companies such as Illinois Tool Works, the price of borrowed money isn't the problem. The company had $1.3 billion in cash on its balance sheet at the end of June, up from $743 million at the end of 2008. Lower interest rates wouldn't make much of a difference, either.
"I could borrow $2 billion tomorrow for 3 1/2 percent," said Speer. "But what am I going to do with it?"
Speer is coming to terms with a new economic reality. After an extended economic boom, the nation is less than three years into the process of working out the excesses of that period.
"It took us a decade to get in the ditch we are in," Speer said. "There isn't going to be instant gratification to get us out of it. We're going to have to get used to a lower growth economy, and that is going to be a big adjustment for all of us."