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Lack of corporate spending marks a different kind of cash crisis

When Campbell Soup Co. unveiled its most recent quarterly results, it showed a five-fold surge in its cash position. But even with $449-million (U.S.) in the bank, one of corporate America's signature companies is restructuring, cutting jobs and focusing on growth outside its U.S. home market.

Welcome to a new kind of economic recovery – one with a cash crisis of a different kind than the liquidity crunch that caused the recession three years ago. This is a crisis of spending, or lack of it. Some of the largest and most profitable U.S. corporations are collectively sitting on almost $2-trillion (U.S.) in cash and contributing little in the way of job creation.

Campbell Soup's cash balance at the end of its fiscal third quarter is a pittance compared with the $91-billion held by General Electric Co., the $28.8-billion that decorates the balance sheet of Oracle Corp. or the $13.8-billion in the coffers of Coca-Cola Co.

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But the fact that Campbell's cash, and the money held by scores of other big corporations, is for the most part sitting idle – and not being invested in growth or new jobs in the U.S. – underscores the fortress mentality that is gripping chief financial officers scarred by the 2008 liquidity crisis.

Dan Ammann, chief financial officer of General Motors Co., which has $33-billion in cash on the books, put it this way last week during a conference call on the auto maker's second-quarter results: "I go back to our fundamental strategy here, which is we want to keep the fortress balance sheet." GM has contributed to job creation, boosting employment in North America to 98,000 people as of June 30, from 96,000 on Dec. 31.

But in a presentation on Tuesday that included a slide entitled "Fortress Balance Sheet," GM said it will increase vehicle production capacity by 45 per cent over the next four years in the BRIC countries: Brazil, Russia, India and China. That will mean new employment in those countries, but not in the United States or Canada, both of which were singled out on another slide as high-cost manufacturing countries.

While business spending and investment isn't big enough to lead the recovery on its own, putting some of that cash to work would contribute to overall economic growth by giving a positive jolt to job creation in the U.S. and increasing consumer confidence.

But "businesses can't really save the day," cautioned Paul Dales, senior U.S. economist of Toronto-based Capital Economics. That's up to consumers, whose spending represents 70 per cent of overall U.S. gross domestic product.

"The problem is they are constrained by some fairly long-term structural issues, such as the need to continue to [reduce their debt] after a period of excess borrowing," Mr. Dales noted.

The belt-tightening by consumers will contribute to slow U.S. GDP growth of just 2 per cent his year and next year, he forecast.

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In turn, that slow GDP growth is one factor causing corporations to keep investment spending to a minimum.

The political upheaval surrounding the U.S. fiscal situation is another factor. "There's clearly a flight to caution and I attribute it to the uncertainty," said Anthony Carfang, a partner of Treasury Strategies Inc., a Chicago-based consulting firm that advises corporate treasurers.

Mr. Carfang pointed to the resolution of the U.S. debt ceiling crisis, which included the creation of a committee that by the end of November will recommend where to cut government spending. Following that will be a political debate before cuts are made.

"We basically layered in another six months of uncertainty on top of a system that has been battered with regulation as well as government bullying," he said. "[Corporate] treasurers just said: 'Fine, wake me up when this is over. I'll put my money in overnight bank deposits and overnight treasuries.' "

Companies don't know what future tax rates will be, whether they will be permitted to hire certain workers or whether the government will intervene in corporate decisions, Mr. Carfang said.

He pointed to a decision by the National Labor Relations Board, which told airplane giant Boeing Co. it was wrong to open a plant in South Carolina to assemble its new 787 plane there instead of in Washington State, where it had experienced several strikes.

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"What the U.S. government is doing with Boeing and its new plant in [South] Carolina is sending a chill down the backs of every CFO that I know," Mr. Carfang said.

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About the Author
Auto and Steel Industry Reporter

Greg Keenan has covered the automotive and steel industries for The Globe and Mail since 1995. He also writes about broader manufacturing trends. He is a graduate of the University of Toronto and of the University of Western Ontario School of Journalism. More

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