Corporate Caution

Stephen Roach of Morgan Stanley begs to differ from Alan Greenspan’s optimistic statement last week that the economy is pretty much past the “soft patch” of the May-July period. Consumers aren’t providing much impetus for the economy, he argues, and neither are firms:

Nor is Corporate America stepping up and delivering any autonomous traction of its own. Sure, hiring rebounded a bit in August after a couple of crummy months. But the three-month average increase of 104,000 for nonfarm payrolls remains decidedly subpar by any standards — about one-third slower than the typical recovery pace and equally short of gains required to keep the unemployment rate stable. And, as noted above, US businesses remain equally frugal on the pay front. Recent trends on the wage income generation front have taken a modest turn for the better. However, in the 12 months ending this July, real wage and salary disbursements still rose just 2.8% — better than the stagnation in the first 20 months of this recovery but far short of the solid income growth that would support renewed vigor in consumer demand.

But the most fascinating insight of all into business attitudes may be the $38.7 billion spike in corporate stock buyback announcements that occurred in July — the strongest such surge in 20 years and fully four times the average monthly pace of the past year. This, perhaps more than anything, puts Corporate America’s cards squarely on the table. Awash in newfound earnings and cash flow, companies would rather buy their own shares than embark on growth oriented strategies of hiring, boosting compensation, and adding to productive capacity.

It will take a little time to guage whether this increase in stock buybacks is a trend or a one-time event, of course. But if it turns out to be the start of a trend, then I agree with Roach that this is not a vote of confidence for the economy. If they were optimistic about the future, then corporations would want to reinvest their current profits to boost future profitability, not just return them to shareholders.