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Twist and Sulk

A fearful economy cries for industry leadership.

Fortnightly Magazine - October 2011

Three years ago, when we were about to go to press with our October 2008 issue, the bottom fell out of the financial markets. At the last minute, I had to scrap the cover story I had written, call my sources back, and write a new article—“ The Path Forward .”

Now, as I write this on Sept. 22, 2011, the stock markets are tumbling. They’ve had their worst week since 2008, and I can’t help but feel a sense of déjà vu.

Although I’m not rewriting anything this time, some part of me thinks I should just re-run my October 2008 Frontlines column, “ A Time to Lead .”

In that editorial, I called upon utilities to lead the way out of America’s economic crisis, by accelerating investments in modern infrastructure: “America’s utilities have begun gradually transforming themselves into something smarter and more efficient. Now the financial crisis calls our utility executives and policymakers to exert leadership, and escalate the industry’s transformation.”

In some respects, utilities have in fact been leading the way out of the recession. Although many companies understandably cut back discretionary spending in 2009 compared to their record-breaking 2008 “Big Build” budgets, as a whole the industry continued strong capital expenditures after the financial meltdown—spending $160 billion over the course of 2009 and 2010.

In 2011, however, it seems that many companies backed away from their spending plans, contrary to expectations from this time last year. The aggregate numbers aren’t available yet, but anecdotally vendors are telling us that throughout this year, many RFPs for projects and equipment have been put on hold or canceled entirely. The reasons behind these decisions vary from situation to situation, but the overall trend—if that’s what it is—suggests that utilities have been shoring up their financial positions rather than investing in infrastructure, whether it’s new facilities, replacements or upgrades.

If that’s true, then utilities certainly aren’t alone; across the U.S. economy, corporate profits are strong, but companies are reluctant to spend money on anything, whether it’s new equipment or new employees. According to Federal Reserve data, corporate holdings of cash and other liquid assets increased to more than $2 trillion in the second quarter of 2011—the highest amount ever recorded as a share of U.S. GDP (see “Corporate profits’ share of pie most in 60 years,” MarketWatch, July 29, 2011) .

This can be called many things, like “strengthening the balance sheet,” for example. Or “pursuing a conservative treasury strategy.” Or perhaps “corporate hoarding.”

But there’s one thing it can’t be called: “Leadership.”

Waiting for the Crash

In mid-September, the Fed spooked the global financial markets by pointing out what everyone already knew—that the economy looks bleak—and trying to spur growth by pushing interest rates even lower than they already were. In what’s informally known as “Operation Twist,” the Fed said it would sell $400 billion in medium-term bonds and use the proceeds to purchase 10-year notes—increasing demand for the