Advertisement
Business Costs & Regulation

Business Spending to Fuel the Economic Recovery

Corporations have plenty of dry powder available.

Businesses are sitting on a cash trove that will soon translate into more jobs and investment.

As last year drew to a close, nonfinancial businesses were holding nearly 15.7% of their financial assets in bank deposits, commercial paper and other superliquid investments -- a total of $2.8 trillion. Aside from a brief period in 2005-2006, when, in the wake of the Enron financial debacle and resulting Sarbanes-Oxley legislation, an environment of exaggerated conservatism took hold, this is the highest cash share in 23 years. If the financial sector were included, the percentage would be at an all-time high. But that’s another story, to which I’ll turn next week.

Advertisement - Article continues below

This accumulation of cash has little to do with the economic recovery, which has been lackluster in most respects. While the high priests of business cycle dating -- a committee of the National Bureau of Economic Research -- have yet to officially proclaim the recession’s end, the corner was likely turned last June. Since that time, output growth has been subpar; assuming a 3% real GDP gain in the first quarter of this year, the pace over the first three quarters of expansion comes to 3.5%. That’s half the post-World War II average pace of 7%, though it is better than at the same stage of the past two “jobless” recoveries in 1991 and 2002. Growth rates over the initial three quarters of those recoveries were just 2% and 2.5%, respectively. (Note: By last October, Kiplinger officially called the end of the recession as summer 2009.)

Advertisement
Advertisement - Article continues below

An obsessive focus on cost containment has led to an impressive rebound of profits, which are disproportionately being stashed in the till. While economic growth crept upward, profits soared, racking up a 27% increase in the second half of last year -- near the postwar average of a 30% gain in profits over the first three quarters following a recession. And that’s assuming no further gains in the first quarter of this year.

Advertisement - Article continues below

The drive to accumulate the cash is largely due to a lack of confidence among businesses. They are reluctant to take on incremental costs while revenue prospects are questionable. Also, many businesses -- especially smaller ones -- are struggling with bank financing, intensifying their appetite for liquidity.

As time goes by and the worst fears aren’t realized, this bunker mentality will change. Financial indicators of risk aversion -- equity prices, volatility and bond credit spreads, for example -- have all turned dramatically for the better. Business sentiments are also on the mend. According to the Conference Board, 64% of CEOs surveyed during the fourth quarter expected their industry’s fortunes to improve, in contrast with just 32% during the depths of the recession. Further improvement is likely to have occurred in the first quarter.

So how big a deal is this? It’s huge. If nonfinancial businesses were to simply reduce their cash share of assets at year-end from the current 15.7% to the 20-year average of 14.3%, it would liberate $246 billion of “excess” cash holdings. After the past few months of health care debate, when figures in the trillions were tossed around, that may not sound like much, but it is. If spent over the next year on, say, business equipment and software, it would add almost two percentage points to GDP growth. Based on last year’s average compensation rate of $57,000, that could sustain 4 million workers for a year. (Note: Business spending has just joined the list of indicators we track and forecast as part of our popular Economic Outlook.)

It all comes down to what economist John Maynard Keynes colorfully called “animal spirits.” Never easy to measure, business sentiments -- whether confidence or anxiety -- about the future surely play a critical role. Fortunately, they’re now moving in a direction that’s conducive to growth.

Advertisement
Advertisement

Most Popular

Turning 60 in 2020? Expect Lower Social Security Benefits
Coronavirus and Your Money

Turning 60 in 2020? Expect Lower Social Security Benefits

When you file for Social Security, the amount you receive may be lower.
July 30, 2020
These 2 Words Could Send Your Retirement Money to the Wrong Beneficiary
estate planning

These 2 Words Could Send Your Retirement Money to the Wrong Beneficiary

"Per stirpes" vs. "per capita." Making the wrong choice could cause an estate planning disaster.
July 30, 2020
Second Stimulus Check Update: HEALS Act vs. CARES Act
taxes

Second Stimulus Check Update: HEALS Act vs. CARES Act

When compared to first-round payments, the new Republican stimulus check proposal expands and protects payments for some people, but it shuts the door…
July 29, 2020

Recommended

Election 2020: Joe Biden's Tax Plans
taxes

Election 2020: Joe Biden's Tax Plans

With the economy in trouble, tax policy takes on added importance in the 2020 presidential election. So, let's take a look at what Joe Biden has said …
July 22, 2020
Answers to PPP Loan FAQs (Now That There's Fresh Funding for the Loans)
small business loans

Answers to PPP Loan FAQs (Now That There's Fresh Funding for the Loans)

Small business owners are getting another crack at Paycheck Protection Program loans. Here are answers to some frequently asked questions about the lo…
July 21, 2020
Travel Planning in the Time of Coronavirus
Travel

Travel Planning in the Time of Coronavirus

Insurance may not cover canceled vacations, but airlines and hotels may be flexible.
June 11, 2020
13 Things That May Soon Disappear Forever (The Pandemic Edition)
business

13 Things That May Soon Disappear Forever (The Pandemic Edition)

Emerging technologies (and now the COVID-19 pandemic) are putting an end to these familiar items and practices.
June 9, 2020