Why firms are not using profits to hire

Eve Troeh Oct 7, 2010
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Why firms are not using profits to hire

Eve Troeh Oct 7, 2010
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TEXT OF INTERVIEW

BILL RADKE: The government’s monthly employment report comes out tomorrow, and the experts don’t expect much good news. U.S. companies have more money on hand than they have had in a while. They’re not using it to give you a job. Marketplace’s Eve Troeh says new data sheds light on why that is and she’s with us live to explain. Hi Eve.

EVE TROEH: Hi there.

RADKE: What are companies doing with their profits, if they’re not hiring?

TROEH: Well, they are buying their own stock. They’re taking if off the market. That makes the number of shares more scarce, which drives up the price, which looks good to investors. And because interest rates are so low, it’s cheap to do this. Microsoft actually did that recently — they borrowed to buy a bunch of stock. Companies are also five times more likely to do this than they were last year. That’s according to the stock research firm Birinyi Associates. The Washington Post has an article on this practice today, and actually its board — at The Washington Post Company — they bought back a ton of shares last month. And their stock jumped more than 4 percent the day they announced that. So, this is a trend. And it works.

RADKE: OK. Anything wrong with that, Eve?

TROEH: Well, it means companies aren’t growing. They’re not adding employees. They’re not developing new products. They’re not building new factories. And critics say boosting the stock price kind of artificially like this is pretty short-sighted. It’s not investing for the future. Now the companies say they don’t want to hire people because they don’t want to lay them off if the economy dips again. And they also say there’s no point of pouring money into research for new products when consumers aren’t in a position to buy them? So, why not shore up our stock, they say.

RADKE: Very interesting. The story of our day. Marketplace’s Eve Troeh, thanks.

TROEH: Thank you.

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