If there’s one bright spot in the sluggish recovery, it’s the record level of profits at businesses. But with renewed worries over the economy and turmoil in the markets, the question is whether those companies will finally start using that money to hire or whether they will continue to hunker down.
After the year started out well for Dulles-based Reston Limousine, business has stalled this summer. Chief executive Kristina Bouweiri is pressing on, ordering eight new buses, buying 10 other vehicles and hiring salespeople, mechanics and 20 drivers, but now she is unsure whether it will all pay off.
“I will not know until mid-September if the bad summer numbers are a continuing trend,” she said. “I see a lot of activity, and I always focus on the positive. I am moving forward.”
As corporate profits have hit new peaks, policymakers — including President Obama — have said they are counting on the private sector to snap the U.S. economy out of its slump by hiring more American workers. So far, many of these companies have been content to squeeze more work out of their employees and wait for the economy to pick up more speed before deploying their money. The strategy has also helped their bottom lines.
If economic growth continues to slow down, though, the hopes that these companies will hire more workers any time soon could fade.
There are signs of head winds for companies. Consumer spending has been shaky. And a measure for consumer confidence, the Thomson Reuters/University of Michigan preliminary index of consumer sentiment, dropped in August from 63.7 to 54.9, the lowest measure since May 1980.
That worries executives who have been waiting for ordinary Americans to open their wallets. Consumer spending accounts for the biggest portion of this country’s economic activity.
“We’ve seen the consumer’s level of confidence is pretty fragile right now, given everything that’s happened in the last two to three months,” said Don Johnson, General Motor’s vice president of U.S. sales, on a conference call last month with analysts.
Still, some local business owners are forging ahead for now.
“It is not the time to blink or hesitate,” said Chuck Rendelman, a co-founder of FroZenYo, the District-based chain of yogurt shops. “The economy is a reflection of a lack of confidence. This a great time to take a look at your own business and how you can improve it.”
Rendelman said the company is expanding into Baltimore and looking for more locations in the District. It is also in negotiations for an eight-store franchise deal in Chicago after closing a deal for two stores in Boston.
John Delaney, founder and executive chairman of Chevy Chase-based CapitalSource, a specialty finance company, said his firm has plenty of capital and liquidity, a strong loan book, and is well positioned for any downturn.
He added that if there is another recession, “companies that . . . sell things that people really need will do fine.”
Delaney said that he is amazed how politicians reacted immediately to the recent dives in the stock market. “Why don’t they have the same sense of urgency to high unemployment?” Delaney said. “I think they misunderstand their jobs. Their job isn’t to make stocks go up. Their job is to keep the country employed, competitive and focused on the future.”
Yet some smaller firms also say they’re having trouble relying on banks for financing.
“Banks have substantially tightened . . . in many cases asking for substantial collateral — business and personal,” said Chad MacDonald, founder of Dulles-based ServiceForceUSA, which manages maintenance at hundreds of buildings around the country. ServiceForceUSA employs 1,000 full-timers.
While multinationals can rely on growth overseas even if the U.S. economy slows down, small businesses have less flexibility. The Federal Reserve on Tuesday said it expects growth to remain weak for two more years.
“It’s the domestic side that will start to get much more difficult to grow profits,” said Nigel Gault, chief U.S. economist at IHS Global Insight.
Whatever economic recovery has existed thus far has flowed mainly to the bottom lines of big companies.
Corporate profits accounted for 14 percent of the total national income last year, the highest ever ratio on record, according to the Commerce Department’s latest numbers.
Those profits also accounted for 88 percent of economic growth during the 18 months following June 2009, which is when economists marked the end of the recession, according to research by Andrew Sum, director of the Center for Labor Market Studies at Northeastern University. By contrast, wages and salaries accounted for 1 percent of that growth in the same time period.
“If they needed more bodies, they’d be hiring more bodies. They’re not hiring because they don’t need to,” said Zachary Karabell, president of RiverTwice Research. “They’re making a lot without it.”