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Cash Hoarders & the Confidence Crisis

US economic engines are sputtering or merely idling at a time they should be firing on all cylinders.

The government has excessive debts, consumers have limited access to credit facilities or just want to shore up savings and pay down old debts, while corporations, which apparently have tons of cash, have frozen capital expenditure and hiring due to uncertainty about the future.

Two news items that crossed the wire on Tuesday, Oct. 27, show how fragile the situation has become. In the first report, {complink 6743|Moody's Investors Service} reported American companies are holding more cash than ever in their banking and other investment accounts. Corporations in the United States have piled up some $1 trillion in cash and won't touch this for business expansion or hiring, because they are unsure how the next year will play out. (See: U.S. companies hoarding almost $1 trillion cash: Moody’s.)

At the same time that companies are growing tightfisted, consumers seem to be clamping down on spending as well, reports {complink 7065|Standard & Poor’s}. The research and credit rating company observed in a report issued also today that US consumers — yes, the same set of people once derided for profligate spending — are saving more than ever and have pushed up their savings rate above 5 percent for seven quarters. The savings rate used to be as low as 1.2 percent, according to S&P.

“Even those who are working will probably slip more dollars into their mattresses than are likely to end up in cash registers at the shopping mall,” says Beth Ann Bovino, a director with Standard & Poor's. “Those mattresses are getting thicker than they've been in a while.”

Fear is the underlying factor behind the higher savings rate at corporations and households. In a previous column I noted that a handful of high-tech companies — {complink 379|Apple Inc.}, {complink 1131|Cisco Systems Inc.}, {complink 2294|Google}, and {complink 3426|Microsoft Corp.} — together had about $150 billion in cash and short- and long-term marketable securities at the end of the September quarter. (See: Richest Tech Firms & the Challenge of Managing Huge Cash Hoards.) The four companies, it appears, are solely responsible for about 15 percent of the $43 billion in cash being held by non-financial US companies, according to Moody's estimate.

Why are these companies so reluctant to spend on hiring and capital expenditure? The simple answer is that they are worried about the numerous unknowns ahead. As Moody's puts it:

    We believe companies are looking for greater certainty about the economy and signs of a permanent increase in sales before they let go of their cash hoards, which they suffered so much to build. Given low demand and capacity utilization within certain industries, companies are wary of investing their cash in new capacity and adding workers, thereby doing little to abbreviate the jobless recovery.

This is a worrying development. Corporations refuse to spend because they are worried, and consumers are reticent to loosen their purse strings due to persistent frights about the housing and financial markets. We all seem to be afraid of our shadows.

No amount of scolding by government officials and economists will make high-tech executives budge if they believe it is in their best interest to sit on cash reserves, and consumers won't any longer spend what they don't have, declining to borrow from the future. If regulators and politicians want economic growth they must find ways to convince consumers the future will be better and give companies convincing reasons to write big-item checks.

9 comments on “Cash Hoarders & the Confidence Crisis

  1. AnalyzeThis
    October 27, 2010

    This is a worrying development. Corporations refuse to spend because they are worried, and consumers are reticent to loosen their purse strings due to persistent frights about the housing and financial markets. We all seem to be afraid of our shadows.

    Unfortunately, I agree. This is clearly a problem which doesn't have a clear solution.

    And then another issue is that many of these corporations — especially in the tech sector — are hoarding cash right now because they're hoping some of their competitors fail in this economy, and then they can use some of that cash to acquire their assets of the fallen at an affordable price. That's potentially a good deal for the buyer, but acquisitions traditionally don't help drive job growth: if anything, it's the opposite because of course the new company comes in, declares many positions redundant, trashes the parts of the company they aren't particularly interested in, etc.

    Ultimately, like you say, it's a confidence crisis. That's a hard thing to restore, especially with the general lack of positive financial news in the media. And with the holidays coming up… well… I'm sure there will be plenty of stories about probably-not-so-great consumer spending and retail performance getting published. That won't help.

     

  2. Hawk
    October 27, 2010

    I am trying to summon outrage on the action of companies that are hoarding cash but it's an almost impossible task. I am not hoarding myself but I am not drawing out my checkbook either at the sight of the neatest gadgets around. I would like to take the iPad or any of the rival tablet PCs for a spin but won't go near them because of job insecurity.

    If I had money to hoard, I would. However, I am not a company and it's a bit unnerving to see four technology companies keeping billions of dollars in the bank whereas it could be used to generate more profits and jobs. That's a hypothetical situation, though, and many companies are as concerned about the first quarter of 2011 as I am about my job security. Who's going to blink first, consumers, corporations or governments?

  3. DataCrunch
    October 27, 2010

    Hawk, I share your outrage, but this is an epidemic among many companies across many industries…just not cash rich tech companies.    Banks, hedge funds, venture funds and other large institutions have boat loads of money right now just sitting on the side lines.  When they plan to unload is anyone’s guess, but my guess is that there will still be a ton of money on the side lines same time next year.

    It’s a catch-22.  These companies will unload when the economy starts recovering and they feel more at ease letting go of their cash reserves.  The economy needs this money that is sitting on the side lines to spur growth through lending and investments.  Which will come first?

  4. Anna Young
    October 27, 2010

    Dave, What should these companies spend money on even if they want to? Seriously, what's there to go and buy in this current economy? I am not being cynical. I would just like to know what anyone of us would expect these companies to spend their money on. Should they buy real estate in the U.S., government bonds in Greece, a rival business in strike-plagued France or put down stakes in Africa? Corporations will spend when the conditions are ripe for investment. Not a second before.

  5. itguyphil
    October 27, 2010

    Hawk,

    I hear you on that. What people fail to remember is that these companies have staffs of accountants that provide some advice on what they should do with their cash reserves. In these times, what worse way to operate than spending without any real purpose. Sure we individuals can sit back & say shame on them & that they should spend  because they have billions. But it take billions to build a large organization and stay relevant.

    They will always do what makes them money. That's a no-brainer. But it has to be spent wisely if you want to stay in business for a decent amount of time.

  6. DataCrunch
    October 28, 2010

    Anna, as I mentioned I don’t think companies will be releasing major funds soon until we start seeing a significant recovery and the overall economic outlook improves.  With that said, I touched upon this on Bolaji’s blog: (See: Richest Tech Firms & the Challenge of Managing Huge Cash Hoards ), in which I believe that the new innovations of the future (which they mostly come from anyway) will come from agile start-ups and entrepreneurs.  I would like to see more money being funneled into these types of ventures which will spur innovation and job growth.  The outrage I was sharing with Hawk had more to do with the overall environment of holding on to cash reserves.  While I understand the rationale, it would be beneficial if the banks, which received bail-out money from the taxpayers, would do what they said they were going to do and lend.  On the contrary, it has gotten even more difficult for small businesses to get loans, which hurts small businesses looking to expand and entrepreneurs looking to start new businesses.  This stunts job growth, innovation and confidence.     

  7. Hawk
    October 28, 2010

    I can't agree more. Fear has taken hold of corporate accounts and consumer wallets and won't let go. Banks are the water carriers for our society, lubricating the system and kicking up innovation with their lending. Companies are not in the business of lending and even the ones with a lot of cash–in good times and not-so good–themselves turn to the money markets for financing. When banks stop lending, and that's the situation now, the economy stiffens and innovation becomes a harder task. Bolaji's report identified non-financial hoarders. It's time somebody did a story on financial hoarders.

  8. Barbara Jorgensen
    October 29, 2010

    I picked up some information this week that likely does not reflect the industry overall but was nevetheless interesting….on its earnings conference call Avnet, which has acquired two major distributors within the past 6 months, said it would not have problems obtaining credit for future acquisitions and wouldn't rule out additional buys. Acquisition targets would have to be strategic–bring in suppliers or customers Avnet doesn't already have–and be able to meet Avnet's ROI goals which is more than 12% after integration.

    Arrow has also made two acquisitions within the past 3 months and noted capital is not a problem. In fact, Arrow spent some money on inventory which it considered strategic–there aren't current orders in for these products but the price was right and Arrow fully expects it's going to need that inventory going forward.

    Analysts on both calls seemed concerned that both Arrow and Avnet increased their inventory significantly. Both companies fully expect to use that inventory in the coming months.

    The issue of jobs and hiring did not come up–my sense is neither distributor is planning on expanding its workforce beyond acquisitions.

     

  9. Backorder
    October 31, 2010

    Adding to what Barbara has mentioned, Semiconductor companies who have managed to have a strong Cash supply are also on the offensive, adding capacity through purchae of fabs and A&T sites, mainly in the east where they are up for discounted prices. I think it is a win-win for they are adding capability to be ready for when the market comes up. It will help gain share as and when the market bounces back.

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