Fortune: Corporate cash hoarding isn’t sustainable - Aug. 2, 2010
By Nin-Hai Tseng
August 2, 2010: 2:36 PM ET
FORTUNE — With record cash on hand and a swell of profits at many large companies, it’s hard not to wonder if corporate America has what it takes to help turn this sluggish economy around.
But hiring new employees isn’t the only way that companies sitting on piles of cash can help stimulate things. Not enough companies are using this time to invest in their future growth without adding to headcount. Investment spending this year on new equipment, buildings, product development, research and other projects has picked up this year, but still falls short of levels seen before the recession.
It isn’t for a lack of resources. Non-financial companies in the S&P 500 index reported $837 billion in cash at end of March, a hefty 26% increase over the previous year’s $665 billion, according to S&P. These are unusually high levels — companies are holding cash reflecting 10% of their value today. Since 1999, companies on average held cash equal to 6.6% of their value.
In many ways, the record levels reflect the scars of the financial crisis. Chief executives learned the hard way what happens when credit markets freeze, as they did in late 2008 and early 2009. And the country’s relatively grimmer economic forecasts aren’t helping as consumer spending continues to slump. The U.S. Commerce Department reported last week that GDP growth slowed during the second quarter, growing by 2.4% compared to 3.7% the previous quarter.
But while companies try to play it safe by upping their stashes of cash, hoarding does little good in the way of improving the broader economy. What’s more, it could hinder companies from prepping for future growth.
Memories of the financial crisis are deep. Worries grow that the nation may slip back to a recession. Yet standing frozen on a stack of cash does little to improve the country’s economic prospects.