Wednesday, 20 of June of 2018

Economics. Explained.  

Corporate Cash

May 8, 2018

Corporate cash holdings  rose $89 billion in the fourth quarter to $2.94 trillion (above) , and  continues to be at an 18-year high 10.8% of non-financial assets (below).

As the recovery first began in mid-2009 corporate CEO’s needed to increase cash holdings for defensive reasons.  They had no idea if the expansion would be sustainable.  Similarly, they could not anticipate the likely pace of growth.  By the end of 2010 they appear to have become confident that they had ample cash on hand to weather almost any economic upset that might occur.  But given considerable concern about the high corporate tax rate, the inability to repatriate overseas earnings to the U.S., unhappiness about the onerous regulatory burden, and a failing health care program in serious need of revision,  corporate leaders were reluctant to deploy these ample cash holdings.

But it is important to remember that all of these cash holdings — checking account balances, CD’s, holdings of government securities and municipal securities — all yield about 1.0%.  It is not good management to have a considerable portion of your assets earning so little.   As we go forward and the stock market continues to climb and the economy continues to expand at a moderate pace firms should become more willing to invest.  The cut in the corporate tax rate, an ability to repatriate earnings at a favorable 15.5% tax rate, relief from the onerous regulatory burden, has encouraged companies to loosen their purse strings by putting more money into technology or building  a new factory.  Nonresidential investment began to accelerate in the first quarter of last year and the pace has quickened from about 0.0% for the previous three years to 7.0%

The faster pace of investment spending has  caused productivity growth to accelerate from about 0% to 1.2% on its way to, perhaps, the 2.0% mark.  If that happens the economic speed limit will climb from 1.8% today to 2.8%.

Stephen Slifer


Charleston, SC

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