Corporate Investment Modest Despite Growth

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Even companies enjoying strong profits and cash flow are hoarding cash, reducing debt and buying back their own shares — instead of making investment bets. David Wessel, of The Wall Street Journal, says this frugality could harm economic growth in the future.


And in our Friday business news, we focus on your money. The economy is growing reasonably well. Productivity is strong, profits are up and cash is flowing into corporate coffers. Business investment is up, too, but it isn't up nearly as much as you might expect. To find out what's going on, we turn to David Wessel, deputy Washington bureau chief for The Wall Street Journal.

Good morning.

Mr. DAVID WESSEL (The Wall Street Journal): Good morning.

MONTAGNE: So why are businesses sitting on all that cash?

Mr. WESSEL: Well, companies usually borrow other people's savings in order to invest and make more money in the future, but at the moment they're extraordinarily thrifty. Even companies that have lots of cash flow, as you said, aren't investing nearly as much as you'd expect at this point. And there are a lot of different theories for that. Maybe it's because they're still shaken by the bubble hangover from the late part of the last decade. Maybe they're feeling the pinch of having all those regulators and Sarbanes-Oxley auditors and reporters looking over their shoulders or maybe--I don't think so, but some people do--they just don't see any profitable opportunities out there.

MONTAGNE: Well, is what's happening unusual or do businesses act like this for various reasons on a pretty regular basis?

Mr. WESSEL: This is pretty unusual. If you look at the history of the last 40 years and measure the amount of corporate savings, the stuff they're tucking away, against the size of the global economy, companies haven't been this thrifty at any time in the past 40 years. Even Alan Greenspan, who seems to understand everything about the economy, has pronounced it as something of a surprise.

MONTAGNE: So is this something to worry about, David? I mean, is it an indicator of weakness in the economy?

Mr. WESSEL: It's definitely something to worry about if it persists. Perhaps we're just about to see businesses return to more normal behavior, taking all this cash that's coming in and investing it in plants and machinery and office buildings and computers. And there are a few hopeful signs. This week, the government's report on the orders that businesses have put in for what's called durable equipment and capital goods was up quite a bit in June, up 3.8 percent, and that's a hopeful sign. The reason to worry about it is that if businesses don't invest now, we won't get the kind of economic growth and productivity gains in the future that are essential if we're going to have rising living standards and be able to afford the retirement of the baby boom and keep pace with all our foreign competitors.

MONTAGNE: Thanks for joining us, David.

Mr. WESSEL: A pleasure.

MONTAGNE: David Wessel is the deputy Washington bureau chief of The Wall Street Journal.

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