U.S. future exceptionalism reposes in privately-owned businesses

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

Having spent the bulk of my 55-year business/industrial career activities developing and orchestrating businesses within a larger corporate framework, I came to the inexorable conclusion early on that the creative climate of entrepreneurial exceptionalism is best nurtured in privately-owned businesses.
This belief is underscored by the fact that two-thirds of America’s traditional employment has flourished effectively in a hands-on-managed business enterprise that operates within a specific sector, which a particular decision-maker has come to know well.

Being part of a conglomerate for most of my years of business experience, I had the good fortune of being totally involved in the valve business. The corporate board of directors and top management, which I eventually became part of, did not deter my total commitment to my original company and subsequent acquisitions that were compatible with the industry in which I gained my experience at all levels.

This bifurcated involvement allowed me to experience the advantages of developing stature within a particular industry, while also coming to grips with the bottom line obsession that pervaded the publicly-held parent company.

It didn’t take me long to realize that such multi-faceted corporations as GE, Gulf & Western, International Telephone and Telegraph, etc. that reached their peak in the latter part of the 20th century, were not oriented to the particular sector in which their companies operated. They were more interested in how well the mixed operations performed as a profit making and cash generation entity for its original investors and stockholders.

Today, there is a swing back to what is euphemistically known as “core businesses.” This has been facilitated by spinoffs, which have generated substantial cash for the surviving entity. Due to the changing demand structure — such as the switch from home-owning to rentals — the surviving central structure has been faced with the need to reeducate itself in the business from which it originally emanated.

Hopefully, this turn of events has enhanced focused ownership and/or a management that is focusing on a particular industry sector’s production, engineering, distribution and marketing — the age-old factors that have made American business and industry the pride of the world’s greatest economy.

Shopping malls in downturn as online shopping reaches highest levels

For years, the fear of a switch from shopping mall activities to online buying has hovered over the nation’s and local retailers.

Prior to the current economic fragility, this concern seemed to be unfounded, as computer shopping comprised a relatively minor percentage of red-hot consumer buying patterns.

But now, shopping centers are feeling the dual pinch of shrinking buyer intensity as well as the explosive expansion of Internet purchases. This has caught the major national chains, especially, flat-footed, although smaller suburban and rural malls are also suffering.

American cities, heavily reliant on sales tax revenues to support municipal budgets, are major victims of reduced shopping center revenues. In effect, this is another nail in the coffin of the cash cows that most municipalities depended upon to balance their budgets.

With municipal sales tax receipts on the down-slide for six of the past ten years, alternative money-generating potentials are seemingly impossible to come by. This will require further belt tightening in already strapped municipal expenditures.

Another effect of this changing set of circumstances is the vacancy rate of existing shopping centers and strip malls. Currently, vacancies are running at 9.1% for malls, the most since 1990. In the smaller outlets, vacant space has exceeded 10%.

Although much of the development of shopping centers came about during the expansion to suburban areas of practically all of America’s big cities, the pace of growth of these retail outlets far exceeded the presumptive purchasing power relating to the population surge of these new residential areas. Although a potentially long-term economic improvement may remedy the current shopping center crisis somewhat, online buying will temper whatever benefits such overall consumer activity brings.

Corporate cash accumulation reflects decreasing future confidence

The liquidity survey recently released by the Financial Professionals Association speaks volumes. Almost 40% of those surveyed reported greater cash balances than a year ago. While 30% indicated that their balances remained the same, only 30% reported cash and short-term investment balance reduction.

With May consumer confidence in a tailspin, this business retention of record cash positions should come as no surprise. In fact, it bodes ill for employment reduction, as thousands of companies look for technological upgrading to replace “hands on” jobs, whether on the shop floor or in the back office.
The motivating factor behind this super-cautious approach by a great majority of America’s businesses is plummeting confidence in the federal government’s increasing rash of financial regulations. Also weighing heavily is the fear of healthcare premiums coming down the pike. Independent surveys point to the latter as being of greatest concern to those interviewed. This, in turn, has paralyzed the desire to hire additional employees, even as attrition reduces the workforce due to retirement or extraneous causes such as health issues.

This freezing of companies’ liquidity has had a positive effect on debt reduction and on unexpected decreased demand for loans from financial institutions, even at current record low interest rates. Companies comprising the Standard & Poor’s 500 group of corporations has exceeded $1 trillion for the first time ever. It’s estimated that all U.S. businesses as a whole are stashing away over $3 trillion on their bottom lines. Banks add another $1 trillion to this unprecedented sum.

With the current post recessionary period flat-lining the traditional recovery surge, the immense liquidity accumulating on the sidelines could provide the dynamic necessary for a massive expansion outburst, once America’s business regains its confidence.

Unfortunately, there is no indication that this will take place until the American public has registered its decision at the forthcoming 2012 presidential election.

Housing pricing plunges found worse than Great Depression levels

Although the nationwide inventory of available housing, both existing and newly-built homes continues to shrink, the price tag on these establishments continues to drift to levels not seen since the mid-nineties. This drop exceeds the percentage shrink reflective of the 1930s’ economic catastrophe.

As thousands continue to desert homes with values lower than their current mortgages, often committed to by owners unable to meet monthly payments, it’s estimated that 40% of homes purchased currently are from banks and other lenders who are stuck with unwanted real estate.

This desperate situation is worsened by a massive departure from home ownership, which was drummed into the successive post World War II generations as the bedrock of lifetime fixed asset ownership. This has reduced home equity as a percentage of total assets to the lowest level since World War II.

Tens of thousands of people, whether metropolitan or rural, are looking for rental apartments or month-to-month individual home leases wherever possible. Ironically, this is increasing shortages in big city high rises as well as in suburban and rural areas. It’s also leaving many homebuilders and developers high and dry, while creating opportunities for contractors, architects/engineers and builders to react to this rolling demand.

However, the homeowning populist propaganda so firmly persuading hundreds of thousands of wage earners to buy low down-payment, low interest housing that their incomes could ill afford, put millions into a hole at the time of the September 2008 financial crash.

In an unprecedented residential Ponzi scheme, many were persuaded that the multiplicity of resale dollars from future home pricing would compensate for those unaffordable payments. To close the deal, a succession of populist presidents made available multi-billions of mortgage support to encourage many would-be homeowners to make such an income-crushing commitment.

This has left the American taxpayer to clean up the mess made by government-backed mortgage giants Fannie Mae and Freddie Mac, who continue to sink deeper into unfathomable debt.

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