Monday, July 26, 2010

Robert Samuelson never mentions the word addiction confidence, but that is the answer to his question: "Why CEOs aren't hiring".

The rebound in corporate profits does allow companies to be more aggressive in hiring and expanding... but for the fact that they're not confident that the sales (and profits) will be there in the future.

And contrary to Samuelson's theory, it isn't because there's a disconnect between capital and labor. There is, but that isn't the reason companies aren't hiring. They're not hiring because they're not confident that they can get a return on their outlay.

Imagine you're the CEO of a company. You cut staff a year or so ago, if you were smart, in anticipation of trouble, or if you weren't so smart, you cut in response to a downtick in sales and profits. And sure enough, your customers cut back on their purchases of whatever it is that you sell (you weren't fortunate enough to be one of the few companies which sailed through unscathed). As the sky didn't completely fall, your customers have started to return and you've enjoyed an uptick in sales and profits. You're tempted to expand, whether it be by hiring additional workers, opening another location, buying a competitor or something along those lines.

But... you're worried. You're worried that there might be a relapse into recession. You worry about the impact of all the government rules on your business. You worry that taxes are going up and that you'll have less money to put towards growth. Not being a government vendor, and thus not rolling in government contracts, you wonder about the impact of the government sucking that much money out of the private sector.

So... you sit on your cash. You continue to run lean and bank your profits. You're not a mutual fund manager under pressure to invest all the funds in the account and you don't run a public company with shareholders demanding that you put your cash to work improving the stock price. You have the luxury to sit, so you sit. You sit and wait for a sign.

Maybe the sign will come in November, when Republican gains signal that while things won't get better, at least they won't get worse. Or maybe you figure that Obama is the single biggest hit to market and consumer confidence so you are counting on having to wait until he gets turned out of office in 2012 before you can relax again.

But either way, you're not going to do much in the way of hiring unless and until you start to think things are going to get better.