Why Companies Are Still Very Nervous

One CEO explains why hiring is so weak—and what could still go wrong.

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As economic recoveries go, this one's a dud. There are still seven million fewer jobs in the economy than there were at the end of 2007, when the recession began. And although the recession officially ended in the middle of 2009, more than one-third of Americans feel the downturn continues, while nearly half say they're worse off than they were two years ago. One of the biggest problems is that companies are hiring very slowly, even though corporate profits have been remarkably strong.

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To help gauge what's going on, I spoke recently with Patrick Byrne, CEO of Overstock.com, the online retailer with over $1 billion in annual sales. Here are his thoughts on the durability of the recovery, the outlook for jobs, and what Americans ought to start doing differently:

There's a lively debate about whether the economy is really bouncing back or not. What do you see? Any apparent bounce-back is a mirage. From the perspective of consumption, yes, the top 20 percent of America is back spending like it's 2007. The bottom 80 percent still have their belts tightened. But from the point of view of underlying structure, I am very discouraged. You know that movie Weekend at Bernie's, where Bernie's dead but the party goes on all weekend because nobody knows it? The question is, how long can the party go on? Well, it can go on a heck of a lot longer than I would have thought. Some people understand that something's gone wrong, and they're not back partying. But it will go on like this until people figure out that the party's over.

Define "party." We have a $14 trillion economy and consumer spending is about $7 trillion of that. In 2007, of that $7 trillion, $1 trillion was cotton candy. It was fake. It came from the wealth effect and from inflated housing prices. People refinanced $1.4 trillion in mortgages, and spent $1 trillion of it. So $1 out of every $7 in consumer activity was just driven by the housing bubble.

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Since the crash in 2008, the government has replaced the $1 trillion that disappeared by spending an extra $1 trillion themselves, as a way of keeping the party at Bernie's going. But at some point the global capital markets will shut it down and discipline the U.S. government's spending. The Fed's program, QE2, is kind of a smokescreen because they've run out of other ways to keep the music playing. The capital markets are going to temper the federal government.

It will end with a Treasury auction failing, as almost happened five months ago in Germany. In fact, just recently the government bought back a big chunk of a Treasury instrument it auctioned off two weeks ago. That was either a disguised way for a Treasury auction to fail, or it was another disguised way to subsidize the Wall Street banks who took part.

These problems all flow from the fact that it's politically popular to spend, and it's not politically popular to tax.

If a day of reckoning is coming, how should consumers prepare for that? All Americans should be very financially conservative. The government is trying to fake it till we make it. To restore confidence and trick people into going back to the way they were, while at the same time subsidizing the banking industry, lending money to them at zero percent, so banks can lend it back to the government at 3.5 percent, have fat profits, build their balance sheets back up, so that maybe we can tiptoe back to normalcy.

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If you're a business, you have to have a disciplined focus on expense control because if you buy into this and start making investments and expanding capacity and the crash comes, you'll be upside down. Unfortunately, that means you have to be very disciplined about hiring. At Overstock, we've generally grown so fast that we've always tended to build our expense structure ahead of our growth. If we're going to be growing 20 to 30 percent next year, we have to be growing our structure this year.

Is Overstock hiring? We are expanding and we are hiring. We plan to open one new facility every nine to 12 months. But retail is only about 1 percent higher than it was in 2007. That's a mix of bricks-and-mortar retail, which is flat or has shrunk a little, and online, which is growing 10 to 15 percent. The Internet always grows 10 to 15 percent more than retail, so that's a natural advantage for us. For us to keep up, it's appropriate for us to hire developers, customer service people, and so on. That's why Overstock is hiring. If you're growing 20 percent, you have to keep up with it.

We're hiring more conservatively than we would otherwise and our hiring is largely in the realm of very high-level software engineers and mathematicians and statisticians. We're in the business of moving electrons, not boxes. If the cookie crumbles, it's going to crumble from the outside in. The first to get hit will be people with physical assets, bricks and mortar, department stores, malls, warehouses filled with slow-moving, high-margin items. Luxury retail, for instance. Our goal is to be as close to the center of the cookie as we can be. We believe that we can actually soften the blow of what's coming for many other Americans.

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What's at the center of the cookie? Algorithms and moving electrons, rather than what you'd have at a traditional department store, such as a lot of equipment. We believe strongly in human capital, rather than equipment. You've got to have talent and it's a lot easier to develop talent than to go find it. It's a much more efficient way to run our company.

Our economy now has about the same amount of GDP as we used to, with seven million fewer jobs. That probably meant we were overstaffed before, probably because we were growing. There's a saying in retail: Buffer or suffer. If you're growing, you always need kind of a buffer built in to accommodate growth. So when you freeze or crash, you're not going to rebuild that buffer until you see robust growth.

How should individuals be reacting to all this? What should people be doing? The big one is education. Invest in yourself. Build your own human capital. That's one thing they can't take away from you. Training—keeping yourself current in your field—is the way to make yourself bulletproof. Get more education in whatever you're in, whether you're an accountant or a bricklayer.

Any particular field you'd advise young people to go into? Yeah: Anything having to do with statistics and data mining. Because 20 years ago, an awful lot of businesses ran on gut instincts and peoples' implicit knowledge. In retail we called them "merchant princes." A guy who had it in his blood. Now, there's so much data about consumer behavior, and patterns in that data. It's an enormously powerful field and it's growing rapidly. We're just at the beginning stages of it. Businesses need the people who can find those patterns. That is data mining.

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Should people be comfortable taking on debt? Polonius was right when he said, neither a lender nor a borrower be. Warren Buffet has said, "Neither a long-term lender nor a short-term borrower be." So any mortgage or other loan you get should be fixed, and as long as you can get it. There could be another 25 percent correction in the housing market. The government is still out there propping everything up with financial two-by-four's, and lying to the public about how things are improving. But I think they are going to run out of lumber.

Twitter: @rickjnewman