"Dry powder" in the world of finance refers to a company's cash reserves, especially during difficult economic times. These cash reserves may be needed by the company to meet its obligations, so building up its "dry powder" in anticipation of tough conditions ahead is smart planning.
An equivalent situation for an individual would be if you: owned your home and automobile(s) outright, had no debt elsewhere and at least $100,000 in the bank. In other words, you’d be resting pretty easy at night.
A snapshot taken in April and May by the Federal Reserve of the 12 regions they serve showed a gradual improvement in the U.S. labor market. United States firms sold more products overseas over the last 3 months. That narrowed our trade gap but not with China.
U.S. employers hired 54,000 in May. Last week only an additional1,000 individuals filed for unemployment benefits. Total new unemployment claims are stuck at above 400,000. It has been stuck there for nine weeks. 7.6 million people are currently receiving some sort of jobless benefits. That figure is down by 90,000 but that could be as a result of unemployment benefits running out.
Evidence of a recovery is not very encouraging. There are 4.6 unemployed people now competing for every one open job. A ratio of two to one is considered healthy for our economy. This brings us back to the corporate stash. According to the U.S. Commerce Department, since the recovery began corporate spending increased 2% on employees. On the other hand spending on software and equipment is up 26% during that same period. Why? Businesses want to save money, increase profits, and improve their position. Demand is soft in this country because people aren’t working. Since people aren’t working they can’t buy. Since they can’t afford to buy corporations don’t hire them. And so they can’t buy. Stop me if you’ve heard this one before.
Here’s where it gets interesting. Businesses receive tax incentives for capital expenditures on equipment. Unfortunately, for us, a lot of that software and equipment is manufactured overseas. Obviously, you don’t have to train or pay a machine an hourly wage. And you definitely don’t have to provide benefits to a machine. So not only are businesses not hiring, they’re sending business you and I subsidize to places that don’t use American workers. That raises the question: What would happen if we replaced tax incentives for software and equipment with targeted hiring?
What does all of this corporate “dry powder” mean for the average person?
It means that when the fear subsides, the economy stabilizes and companies are convinced that the “coast is clear”, the turnaround could be rapid. Putting $1 trillion of cash to work in the economy, whether in the form of mergers and acquisitions, new product launches, capital expenditures, or even buybacks, can do a heck of a lot to solve those stubborn unemployment figures.