The fall conference season is in full swing, and I have been traveling the country to talk about the state of our industry in between client obligations. I get large and interested audiences when I pose my thoughts on how our industry is doing, and when this economic maelstrom will end. Unfortunately, I am no better equipped than any other pundit to pinpoint the timing of the economic turnaround.
At press time, there was a report issued from the National Bureau of Economic Research, the panel of academic economists charged with the official designation of business cycles, that the recession ended in June 2009. Tell that to the producers in our industry, where there is clearly no sign of improvement in what was billed as our prospective “summer of recovery.” However, I do have some direction signs that will tell us when the economic winds are changing.
Many writers, including myself, have noted during the economic pain of the last few years that housing will lead America out of the great recession, as it has in almost every recession since World War II. Not this time. There are too many markets with too many inventory/pricing imbalances that may take a couple more years to work their way through the housing economy.
The problem is uncertainty about home prices. Only when the American home buyer sees a return of higher housing prices will we see growth in the housing market. So where should we turn for signs that the economy is improving? Corporate America.
Money in the bank
The Federal Reserve reported last summer that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March. That was up 26% from a year earlier and the largest-ever increase in records going back to 1952.
Cash made up about 7% of all company assets, the highest level since 1963. One journalist recently opined that the figure is probably well past $2 trillion at this point.
While renewed confidence in corporate-bond markets has allowed big companies to raise a record amount of money, many still hesitate to spend on hiring or expansion amid doubts about the strength of the recovery. They are also anxious to keep cash on hand in case Europe's debt leads to a new market freeze.
The rising corporate cash balances could represent a longer-term behavioral shift in the wake of the deepest financial crisis in decades. In the darkest days of late 2008, even large companies feared they wouldn't be able to meet the short-term borrowing needed to make payrolls and buy inventory. That liquidity crunch made them realize the value of a dollar in hand.
The comfort of having cash reserves, though, comes at a high price companies may not be willing to pay for much longer. They are earning almost no interest on their cash holdings, making it more difficult to achieve expected returns.
Stockholders will pressure them to pare down cash holdings, as they become increasingly uneasy about companies sitting on cash at a zero return. I believe they will soon increase investments as an alternative to making payouts to shareholders in the form of dividends or share buybacks.
In a recent CFO magazine survey, corporate chief financial officers reported they expect capital spending to increase by 9% over the next year, compared with 1.5% when they were asked the question last December. They expect employment to grow by 0.7%, compared with the 1.4% drop expected just a few months ago.
The willingness of corporate America to deploy these cash reserves toward new investment will play the lead role in the recovery at a time when consumers need jobs. Only then will the housing recovery follow.