Businesses Holding Onto Their Cash
Record profits in recent years have U.S. corporations sitting on a pile of cash. But they’re not willing to risk pouring much of into expansion plans as long as the economy remains weak.
It’s a painful catch-22: Businesses need to spend more to generate a stronger economy. More rapid growth requires businesses to build more facilities, buy more equipment and put more folks to work. That will generate more consumer income and more consumer spending. But as long as growth remains weak, business managers think it’s too risky to open the corporate vaults.
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As long as the economy is weak, businesses won’t risk dipping into their hoarded cash. The fact is, U.S. corporations are sitting on a huge stockpile of cash or cash equivalents — already $2 trillion and likely to keep growing. Much of it is held by big, solid firms such as Microsoft, General Electric, Pfizer, Google and so on. About half of the hoard is in the hands of S&P 500 companies. Because small businesses aren’t earning much in the way of profits these days, they don’t hold much cash.
Washington could try to shake some of that loose. But it probably wouldn’t work. There’s no policy proposal on the table that would change the calculus involved. One-time tax incentives — President Obama’s idea — won’t alter long-term hiring and investment plans that are based on expectations about the economy. As for the congressional Republicans’ proposal — slash the tax rate on profits that are repatriated from foreign subsidiaries, with the lowest rate given to firms that increase hiring — it may well get the nod from Congress. But it won’t coax managers to add much to payrolls.
Corporate managers are still thinking defensively, following the financial crisis of 2007-2008, when banks froze lines of credit even to safe, well-managed companies. Trading in commercial paper, which is used to smooth out cash flow, all but stopped. Cash-heavy balance sheets are seen as an in-house insurance policy against a possible rerun, this time triggered by sovereign debt defaults in Europe. Concern about the United States slipping into another recession doesn’t help either.
And some firms want a stash of cash ready for acquisition opportunities. That’s true of tech companies, in particular. Apple sits on $75 billion; Microsoft on $52 billion; Hewlett-Packard on $13 billion; Intel and IBM, $12 billion each.
Some of the trove is going to shareholders via dividends and stock buybacks. So far this year, dividends are up 18%, though the total won’t match the 2008 figure of $248 billion. Staples, Colgate-Palmolive and others -- even Berkshire Hathaway -- are using some of their cash to buy back stock, reducing the number of outstanding shares. All told, nearly $109 billion went to buybacks in the second quarter of 2011…a few billion shy of the $114 billion dedicated to buybacks in first-quarter 2008, just as the recession was beginning.
Meanwhile, growth-spurring investment is being stinted. Though spending on equipment and software has risen steadily since the recession ended in mid-2009, it’s still off 10% from 2005, when the economy was 4% smaller than it is today. Spending isn’t enough to replace aging and outdated equipment and facilities, much less sufficient to spur the expansion the economy needs.