Traverse City Record-Eagle

Business

November 6, 2013

Slow economy, big profits

(Continued)

FedEx is cutting jobs, too. And though its quarterly revenue rose just 2 percent, its earnings grew 7 percent. The company has cut maintenance costs by replacing older aircraft with more fuel-efficient planes. The shift helped reduce maintenance costs 11 percent in the June-to-August quarter.

The new planes are merely replacing older aircraft rather than expanding FedEx’s fleet. So the economy doesn’t stand to benefit as much.

The average sales growth of an S&P 500 company was 2.35 percent in the first six months of 2013, down from 3.76 percent in 2012, according to S&P Capital IQ. The average profit margin for an S&P 500 company widened from 8.1 percent to 9.1 percent in the same period.

— CASH HOARDING

Higher profits could help the economy if corporations plowed them back into new plants, equipment and other projects. That hasn’t happened.

“Corporations have been extremely cautious in their spending in this recovery,” said Maki of Barclays.

Business spending on big-ticket items like computers, industrial machinery and capital goods has remained about one-third below the average in previous recoveries, Harris estimates.

Instead, companies have stockpiled a record $1.8 trillion in cash, according to the Fed, up nearly 10 percent since the recession ended in 2009. And thanks to the Fed’s drive to keep rates low, big companies have been able to borrow cheaply and replace their higher-cost debt.

All that has bolstered corporate finances and helped boost stock prices even though companies remain reluctant to expand.

Improved finances are “great for the company and its stock price, but from the point of view of the broader economy, you’d prefer they use the money to hire more workers and invest in more projects,” Harris said.

Why are companies holding back?

Economists say chronic budget fights in Washington and Europe’s financial crisis have left executives uncertain about the economy and reluctant to commit to big projects. So have the uncertain consequences of the Obama administration’s health care law, said Mark Vitner, an economist at Wells Fargo Securities.

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