Despite Pickup in Profits, Companies Remain Conservative

JULY 23, 2010

By Dwight Brown, CFC Derivatives Supervisor

Overall corporate profits have recovered from declines experienced during the recession. Profit levels through Q1 2010 were 5.7 percent higher than Q4 2007. And yet the labor market is far from its pre-recessionary level, having lost a net 7.5 million jobs over the same period. Despite the rebound in profits, companies remain on the sidelines pending stabilization of economic conditions.

Companies have expanded cash stockpiles and focused on investing in more conservative vehicles while indicating no immediate plans to ramp up business operations. As of Q1 2010, corporate cash holdings stood at the highest level since 1963, according to the Federal Reserve. What is more, three out of 10 companies expect to increase cash holdings within the next six months, a clear indication that businesses plan to maintain flexibility in case economic conditions take a turn for the worse.

The pickup in employment has been slower than expected given the severity of the recession, and some argue that companies’ hesitation to resume hiring is actually one of the reasons economic momentum has stalled over the past few months. Economists usually expect a sharp rise in employment after a severe recession as companies regain their footing and hire workers to resume business as usual.

The current situation is different: Companies became profitable while cutting jobs, shortening the work week while facing little pressure to increase wages. The private sector has added jobs throughout the year, but the strongest monthly job gain was driven by government hiring of temporary workers for the 2010 census. The economy shed a net number of jobs for the first time all year when census workers were let go in June, and the level of hiring in the private sector was not enough to offset those job losses.

Going forward, companies may remain cautious until it becomes clear how the European sovereign debt crisis and slowing global demand will affect the business environment.