Slow-Growth GDP, Unemployment Culprit: U.S. Companies Hoarding Cash

New government data released Friday reveals the economy barely grew at all in the first half of the year, signaling that unemployment will remain high and that the nation's housing slump may continue longer than many economists had hoped.

Everybody wants to know what it will take to get America's economy moving again, throttling past the meager 0.4 percent growth the Commerce Department says we experienced in the first quarter of this year and the 1.3 percent growth rate registered for the spring.

The answer can't be found in Washington. Or in the pocket books of American consumers. Not directly anyway.

Some like legendary investor and Berkshire Hathaway leader Warren Buffett suggest an imminent housing recovery will get people back to work, thus getting the economy moving again.

But that's the wrong side of the chicken and the egg argument.

Housing isn't going to recover to any meaningful degree any time soon. The only thing that will get America moving again is companies letting go of hoarded cash, putting people back to work.

Since the recession officially ended, Wall Street and Main Street haven't shared the same interests.

Wall Street is on a road leading to record corporate profits, while Main Street is on a road leading to high unemployment and sluggish wage growth.

Corporate America has never been so lean and lush.

Many stocks are trading near 52-week highs, fully recovered from hits than landed hard during the Great Recession of 2008. Two years after the official end of the recession was declared, American companies are posting strong, and in many cases record, earnings in the second quarter of this year.

In fact combined earnings of companies in the Standard & Poor's 500-stock index are expected to increase almost 14 percent from the same period one year ago, spelling record results for many corporations.

Also, corporations collectively are hoarding more cash than ever before, posting glowing balance sheets. At the end of 2010, companies held an estimated $1.9 trillion of excess cash, and so far in 2011 most have not let go.

Apple, for instance, now has $76 billion in cash on its books.

Contrast that with what's happening on Main Street.

Unemployment remains high, at more than nine percent. That's a daunting figure considering the recession officially ended two years ago. Some economists think the number could trickle higher even in coming months.

But that's not the hardest part of Main Street's story.

Wages among the middle class employed are flat, and many people are now doing jobs and daily tasks that three and four people did just several years before. So as corporate profits jump with increases of 20 percent or more to all-time highs, and stocks rise on Wall Street in accord to levels near all-time highs, Main Street America is shuffling along a different path, trying to keep up in the new, new economy.

The reason for the opposing trends is clear. In the recession, companies became obsessed with avoiding the one cost that's hardest to control: payroll costs.They can quickly reduce inventory, they can quickly delay technology investment, but they can't quickly and easily shift from bloated payrolls.

Also, companies are benefiting from the adage that any job in a slow-growth economy is a good job -- meaning those that have work are quick to take on more responsibilities so they can keep their job, and even earn more.

Thus, companies have little incentive to start hiring again in large numbers. They are merely driving more productivity out of what they have, or shifting how they've done it before by relying upon more technology to drive revenues forward.

Companies are still hiring, sure. But they are filling positions that are clearly needed, perpetually delaying what's not clearly needed.

Back in the day, in the years before the recession, many large companies routinely shuffled in large numbers of new employees, to keep an ever-flowing stream of talent to train and cultivate. Now, though, lean is the operative mode when it comes to payroll, meaning the interests of Wall Street and Main Street are traveling along divergent paths.

Corporations are finding lower-priced alternatives in many instances by looking globally and outsourcing high-skilled labor jobs, and they have used technology to streamline other operations, reducing personnel needs.

For investors, this has been viewed good news. Those with capital to invest during and after the recession have gained wealth. But they have also gained advantage over working class Americans who live paycheck to paycheck.

Sensitivities are growing nationally over the issue, particularly since the U.S. government invested heavily during the recession with taxpayer dollars to keep many companies and industries afloat. The argument made at the time was that companies must be strong so job growth can resume.

Right.

That argument did not take into account the shift that most corporations made in light of the difficult new economy, where growth domestically doesn't come easy and growth abroad can easily be fueled by workers who earn in some instances of fraction of what U.S. workers earn.

Technology investment also comes at a fraction of what it used to.

Now, both policy makers and Americans trying to make household ends meet on Main Street are facing the reality that the divergent paths travelled by Wall Street and Main Street isn't an aberration in the recovery years following recession. Companies don't want to put their money in people.

Until that changes, America will continue to be plagued by a slow-growth economy and high unemployment. And eventually, the slow-growth economy the companies are helping to perpetuate by hoarding cash will come back to bite them.