Yahoo Finance Why Obama Is Right About Business 'Doing Fine'
Had President Obama changed one word in his recent evaluation of the private-sector economy, he wouldn't have found himself trying to explain away a clumsy gaffe that could cost him votes among millions of struggling Americans.
In a recent press conference, Obama spoke these now-notorious words: "The private sector is doing fine." The remark sent shock waves through the political class, with the right trying to make Obama look out of touch with small business owners and the left scrambling to walk back the president's comments.
[Slideshow: 5 Reasons Obama Is Right About Business 'Doing Fine']
Obama's point was that Washington could be doing more to stave off public-sector layoffs--which include teachers, cops, firefighters, and local bureaucrats--that are occurring as many states and cities cut spending. He tried to argue that private-sector firms don't need as much help. A lot of small-business owners plainly disagree.
But had Obama argued instead that Washington no longer needs to worry about helping big companies, he would have been right. Here's why:
Big companies are highly profitable. Combined net income for firms listed in the S&P 500 stock index has risen by double-digits for the last three years, according to S&P Capital IQ. That has happened because big firms have slashed costs--partly through layoffs--while managing to raise revenue. Earnings growth has been leveling off, but it's still expected to grow at a healthy clip. Capital IQ expects earnings growth for big firms of about 7 percent per year in 2012 and 2013. Bank of America Merrill Lynch recently advised clients that "the US equity market remains strong relative to the rest of the world." And it said that "mega-caps"--the 100 biggest U.S. companies--are the strongest of all.
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They have lots of cash. Big U.S. companies hold about $1.7 trillion in cash reserves, according to the Federal Reserve, up from about $1.4 trillion in 2008. That's a lot of money--equal to about 11 percent of GDP--which indicates a lot of companies are stockpiling cash in case they need it to survive another downturn. If the economy stabilizes and business leaders become more optimistic, they'll use some of that cash to hire more workers and invest in new plants and equipment.
Big companies are global. And that's where the money is. More than 40 percent of profits for S&P 500 firms come from outside the United States, which allows such firms to diversify their operations as a hedge against problems in any particular region. General Motors's derives a significant chunk of its profits from China, for instance, where the car market is booming. Much of Wal-Mart's growth is coming from Brazil, India, China and Mexico. An international presence also gives big companies more flexibility in moving money around to reduce the amount of taxes they pay. Few small companies enjoy such advantages.
Technology is booming. And that's one industry where American firms still have a leadership position. Big tech companies like Apple, Google, Microsoft and now Facebook have worldwide brand cachet and the reach to market themselves practically anywhere. Apple has become such a powerhouse that on some days, its stock gains have almost singlehandedly moved markets higher. A lot of smaller firms benefit from the tech boom too, riding the wave created by their bigger brethren.
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It's a buyer's market for talent. It's not just teachers, cops and firefighters who are unemployed. Lots of managers, technical experts and administrative workers are either out of work or underemployed, which gives big companies with cash to spend the pick of the litter when they do need to hire. They can also draw the most talented new grads and offer the pay and perks needed to keep productive workers around for a while. It's good to be a big company these days.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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