Weekend Economists' 19th Nervous Breakdown April 6-8, 2012

[Demeter]

6. Companies May Finally Be Starting to Spend That Cash

http://www.businessweek.com/articles/2012-04-04/companies-may-finally-be-starting-to-spend-that-cash

It’s one of the many ironies of the last few years: The Federal Reserve lowered interest rates in order to (among other things) compel businesses to spend their cash rather than save it. And yet, the pile of corporate cash has grown astronomically in the face of interest rates kept near zero. According to Moody’s (MCO), U.S. corporations were sitting on $1.24 trillion of cash at the end of 2011. That’s more than 8 percent of the entire U.S. economy.

It’s not hard to understand why companies are hoarding cash. With growth tepid and demand low, there’s a decent chance a new factory built in the last couple of years would end up being an idle factory. And let’s not forget one of the key lessons of the financial crisis: It’s always better to have too much cash than not enough.

Nearly a quarter of that giant cash pile belongs to just five companies. Apple (AAPL), Microsoft (MSFT), Cisco (CSCO), Google (GOOG), and Pfizer (PFE) have a combined $276 billion in cash and cash equivalents. And more than half of the whole thing is parked overseas, thanks to our 39 percent corporate tax rate, the highest in the world now. While it’s true that firms have been putting some of that cash to use, a lot of it has gone toward things like dividend hikes and stock buybacks over the last couple of years, which don’t exactly kick the economy into gear.

Some recent data indicate firms are finally starting to spend their cash on things that will actually grow the economy. The latest survey of small businesses by the National Federation of Independent Business shows that 57 percent of firms have made a capital expenditure over the last six months, the largest percentage since March 2008. Much of that appears to be going toward big-ticket items. A combined 63 percent of firms report spending on new equipment and vehicles. Nineteen percent of firms reported having spent $10,000 to $49,000 over the last six months, while 11 percent said they spent $100,000 or more...A new survey of 2,200 executives of companies with up to 499 employees found that they expect to increase spending by 5.9 percent this year. That’s likely a lowball estimate, since last year the same study by American City Business Journals predicted a 4.7 percent rise, when in fact spending increased 15.3 percent...