One of the persistent assumptions about our currently weak economy is that corporations are sitting on piles of cash, piled up partly thanks to rising profits, and aren’t investing it or even holding it in something else — it’s been cited by liberals as evidence of corporate greed, and by conservatives as evidence that investors are deterred by government regulation, or sitting out an anti-business presidency.
The Federal Reserve’s numbers backed this up, suggesting that corporations had significantly increased their cash holdings, both in real terms and as a percentage of assets, but they’ve now revised them to show that, well, that isn’t the case. The Wall Street Journal explains:
The bottom line: Corporations have nearly $500 billion less cash on hand than previously believed.
To be sure, companies are still holding onto an unprecedented amount of cash. As of the end of March, nonfinancial corporations had $1.74 trillion in liquid assets on their balance sheets, $12.6 billion more than at the end of the year. A decade ago they had barely $1 trillion on hand.
Perhaps more significant than the number itself, however, is how the revision affects the trend. Before the revision, the Fed showed corporations continuing to accumulate cash, with liquid assets rising nearly every quarter since the recession ended and reaching a record $2.2 trillion at the end of last year. Now, however, it appears corporate cash piles grew rapidly through 2009, then leveled off. Companies aren’t spending their cash, but they aren’t holding more of it, either.
Moreover, companies are holding a smaller share of their total assets in cash. At the end of 2009, liquid assets made up 6.3% of their corporate assets, the most since the 1960s. Under the unrevised data, that share continued to grow, topping 7% last year. But the revised data show cash has actually fallen as a share of assets, to 5.7% at the end of March, its lowest level in the recovery.
This WSJ graph aptly demonstrates the adjustment: