For a clue to Corporate America’s state of mind, look no further than the piles of money stashed under its mattress.
Facing an uncertain economic environment, U.S. firms have socked away cash at a rapid clip, amassing a rainy-day fund the likes of which hasn’t been seen in over 40 years.
At the end of March, non-financial firms had accumulated a record $1.84-trillion (U.S.) in cash and other liquid assets on their balance sheets, according to the latest figures from the U.S. Federal Reserve Board. As a percentage of total company assets, which include factories and other investments, cash is at its highest level since the early 1960s.
When and where companies decide to use their stockpile will be a key factor in the strength of the recovery. If companies feel confident enough to invest in new equipment or make acquisitions, it will spur economic activity and hiring. If they remain anxious, such decisions will be delayed, dampening overall growth.
Such hoarding can’t go on forever. Companies that keep piles of cash sitting in the bank earning razor-thin interest rates will eventually face the ire of investors, who will demand that the money be put to better use or returned to shareholders. Two options: paying higher dividends or buying back shares.
The levels of cash are rapidly becoming too much of a good thing, one investment bank argued recently. Cash-rich U.S. companies are like seals bulking up their blubber, noted a report from Credit Suisse. Such fat protects the animal during a harsh winter, but quickly becomes a nuisance in warmer weather, analysts wrote.
The real question for U.S. companies is what business climate lies ahead. Recent data suggest that economic growth in the United States is slowing markedly. If firms “weren’t nervous last quarter, they’re nervous now,” says Howard Silverblatt, a senior analyst at Standard & Poor’s who tracks the firm’s trademark stock index.
