The Big Winner of the Great Recession Is …

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The recent recession has been the most brutal since the Great Depression and has caused enormous hardship for many American families, as well as immense financial problems for governments around the world. As a result, it’s hard to see the downturn that began at the end of 2007 as anything but a catastrophe. With household incomes generally lower and poverty rates significantly higher than they were 10 years ago, it’s easy to feel that everything is falling apart. But amid the wreckage, there are some success stories that are vitally important for the recovery and the future prosperity of America.

The big winners of the recent Great Recession have been the largest U.S. corporations. This isn’t simply because they are greedy and rapacious, or because they can steamroller everything in their path. Rather, it reflects the fact that they are in a position to use the recession as a positive opportunity to restructure and become more efficient, while government, small businesses and most American households are forced by circumstances to play defense.

In every economic system, there have to be occasional corrective phases, where inefficient and uncompetitive businesses and services are eliminated, costs are lowered, and ground is cleared for new growth. But not every part of the economy is equally well positioned to do this. Government usually has to worry first about unemployment. It therefore tries to preserve current jobs and existing businesses, rather than focusing on restructuring government services to make them more effective or reforming social programs to lower their long-term costs. Most households and many small businesses give top priority to immediate concerns in a recession, because they have to respond to the short-term pain rather than the potential for long-term gain.

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The organizations that have the resources to think about the future and position themselves accordingly are typically the largest corporations. Sure, some big companies have failed – most notably banks – but most have been able to take advantage of reduced labor costs and low interest rates to boost their productivity at the same time that they are strengthening their balance sheets. Consider the following:

Labor costs are down while productivity is up. The most recent data from the Bureau of Labor Statistics show that quarterly productivity in manufacturing rose 5%, while unit labor costs declined 5.1%. Basically, as companies shut down their least successful business operations, they are left with the most efficient and productive ones. Moreover, wages are not keeping pace with inflation right now. In fact, adjusted for inflation, they are down 2.3% from a year ago, the biggest such decline since 1948. The overall result is that companies are getting more from their workers without having to pay them more.

Top companies are able to refinance their debt at low interest rates. The Federal Reserve’s policy of quantitative easing has made plenty of money available at low interest rates. Giant corporations with excellent credit ratings can therefore restructure their balance sheets any way they want – boosting cash on hand or locking in long-term borrowing exceptionally cheaply. As a result, the value of corporate balance sheets has risen by 28% since late 2009. Much of the needed refinancing has now been completed, although some companies, such as GM and Ford, still have big bond offerings coming up.

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Money is rolling in. Higher productivity, moderate labor costs and restructured balance sheets combine to make companies more profitable. In fact, corporate profits are now at a peak in dollar terms and close to an all-time high as a percentage of GDP. Overall, profits have more than doubled since 2000, while stock prices are actually lower than they were 12 years ago. What that means is that lots of great stocks are now cheap by historical standards.

Corporate cash holdings are immense. Nonfinancial companies are taking in hundreds of billions of dollars more than they need to fund current operations. Total cash reserves at U.S. corporations total more than $2 trillion, close to a 50-year high in relative terms. Perhaps not surprisingly, some of the companies with lots more cash on hand than they need are paying ample dividends. Oil giant Chevron, with $20 billion in cash, now offers a 3.1% yield. Chipmaker Intel, with $15 billion, now pays 3.3%. And health-care conglomerate Johnson & Johnson, with $30 billion, yields 3.5%. (I give a longer list of companies that are likely to grow dividends here.)

In part, these huge cash reserves reflect the uncertainty corporate executives feel about whether to expand right now. Demand is still soft, government policy on taxes and regulations is confused, and risks of a currency collapse in Europe are impossible to gauge. As a result, many U.S. companies are simply hunkering down and hanging onto their money until the picture gets clearer.

There’s no guarantee, of course, that the U.S. economy will continue to get better. Recent small improvements could suddenly be reversed – for example, by upheaval in Europe that leads to a worldwide double-dip recession. But at least most U.S. businesses are in better shape than they were a couple of years ago. And once a sustainable recovery does get under way, the companies that have been able to make the most of the recession’s opportunities are likely to prosper in the years to come.

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