As 2013 unfolds, the Washington fiscal debate is looking ever more like a scene from Groundhog Day. In theory, the US government pulled itself back from the brink of the fiscal cliff two weeks ago, with a last-minute deal on taxes; in practice, though, politicians are jostling (yet again) over the next fiscal deal and (yet another) nail-biting debacle on the debt ceiling. Little wonder, then, that American business leaders are now deeply disenchanted with Washington; rarely has the American political process looked so unedifying and so uncertain.
But as the drama unfolds, is this uncertainty really having any impact on how American companies are deciding to use (or not use) their cash? It is an increasingly important question. And this week a piece of research emerged from Canada that presents a new wrinkle in the debate.
In recent years, commentators and politicians have often bewailed the fact that American companies are sitting on oodles of spare cash. Some studies calculate this to be about $2 trillion; others put it even higher (the difference partly depends on how you define an 'American' company). Either way, what is crystal clear is that this cash hoard has been rising. Recent surveys from the Association for Finance Professionals, for example, suggest 40 per cent of American companies had more cash on their balance sheets late last year than in the previous year and AFP treasurers have been increasing their cash balances in every quarter since the financial crisis struck.
Logic might suggest this is not an ideal development. After all, if companies are hanging on to cash, rather than investing it in machinery or hiring workers, that will not create growth. And that, in turn, points to a dismal mindset: unused cash implies companies are also uncertain about the future. Cash piles are tantamount to a vote of no-confidence in the ability of government to deliver stable growth; or so the popular perception goes.
"US corporate treasurers, like the rest of the world, are in a wait-and-see mode,” the AFP says. "They are not yet deploying their cash reserves. In fact, they are continuing to build cash reserves.”
But is there another way to look at that cash mountain? Finn Poschmann, vice-president of research at the CD Howe Institute, a rightwing think-tank in Toronto, has recently analysed historical data on Canadian corporate balance sheets, and come to some striking conclusions. Looked at from a long-term perspective, this cash hoarding is not a new phenomenon, he argues. On the contrary, cash holdings first started to rise a couple of decades ago and then bounced up in 2003, shortly after the collapse of the internet bubble. They also jumped again after the financial crisis of 2007/08 but, since that simply built on earlier rises, it implies the trend cannot be blamed on the financial crisis, or political uncertainty alone.
Instead, Poschmann thinks "changing trade conditions, improvements in technology and logistics, and responses to market incentives” are the main reasons why cash holdings are rising.
More specifically, the spread of just-in-time manufacturing processes and sophisticated supply chains mean companies no longer need lots of inventories and accounts receivable on their books; they can source goods in a hurry, when needed. But only if they have cash on hand; and the recent recessions and financial dramas have shown the wisdom of maintaining "precautionary” savings.
The net result is that cash has partly replaced inventories on the balance sheet. Two decades ago, for example, Canadian manufacturers’ holdings of cash and inventory were equivalent to 3 per cent and 16 per cent respectively of all corporate assets; now they are 6 per cent and 11 per cent.
"Concern over mounting corporate cash seems mistaken,” Poschmann argues. "While businesses have increased the share of assets they hold as cash... they have simultaneously decreased their share of current assets held in non income-earning forms.”
This argument does not necessarily let American politicians off the hook completely: even if the cash hoarding story is more complex than it might appear, the weakness of business investment is almost certainly affected by political and economic uncertainty. Moreover, Poschmann’s analysis only covers Canada and while it probably applies to the US as well, there is limited research.
But if nothing else, this debate about cash balances is a timely reminder of the dangers of assuming too much direct causality between politics and the "real” economy; structural changes often matter to business more than Washington dramas. And that, perhaps, is a reason for cheer; particularly as we face that fiscal Groundhog Day.
Copyright The Financial Times Limited 2013.