Randomly Noted

A few of us just had lunch with the CEO of  Eaton Corp., Alexander “Sandy” M. Cutler, and got a glimpse of how at least one corporate chieftain views the economy and government policy-making. As corporate executives go, Cutler’s fairly outspoken: U.S. government debt is waaaay too high and we have to do something about it “sooner than later.” That means raising interest rates to attract capital while also making sure the Congress and president don’t pass too many deficit-expanding policies, he argues.  Cutler’s not against some of these programs per se but the timing is wrong, he maintains.

The rest of the world, anxious about our debt load, needs clear signals, soon, that the U.S. has a grip on its finances, he says. Today’s news that third-quarter gross domestic product rose 3.5% is pleasing, of course. But Cutler sees enough stumbling blocks to forecast a 10%-plus unemployment rate lasting through 2010 and effectively hampering much in the way of economic growth.

Companies, including Eaton, won’t jump to re-hire laid-off workers for more than a year; they’re too cautious, having endured a shocking economic downturn, and will prioritize generating improving profits even if it means maintaining low inventories as demand picks up, Cutler believes. Eaton, an industrial firm with a focus on managing companies’ power needs, gets 55% of its revenues overseas, producing and selling offshore and thereby not exposing itself to currency fluctuations. He thinks this is an increasing trend as U.S. exporters realize the benefits of locating more of their operations in growing markets such as China and Brazil.

We asked Cutler if many other CEOs are talking about the federal debt and the potentially giant cost of health reform and other Obama administration programs. Washington, D.C., “is a crowded place” right now, he said, adding that Eaton is talking with senators, Congressmen and members of the executive branch.

Politicians need to make sure the U.S. economy emerges from the recession in better shape than it went in; companies that do likewise will take off once demand recovers, he said. But the government’s mountain of debt could hobble it for many years to come if policymakers don’t make the right decisions.

I asked Cutler what Fed Chairman Ben Bernanke should do to bring interest rates back to normal levels. “The U.S. has got to signal that they’ve got the message” from foreign economies rattled by our deficit and weak dollar.

“By the time we exit 2010, we have got to be on a more visible road to more normal interest rates.” Cutler did note that a big chunk of federal stimulus spending won’t truly kick in until 2010, giving the U.S. economy a potentially very nice filip as the recovery continues. But “we really don’t have a recovery until we get to a 3% Fed funds rate. We need a higher rate to attract capital,” he added.

Cutler had interesting things to say about the plight of small businesses which comprise his supplier and customer bases; in effect, they continue to have difficulty getting bank loans. This is clearly a recovery which is lifting big boats ahead of dinghies.