American corporations reduced cash holdings

Noam Stiekema

The American corporations reduced cash holdings for the first time since the end of the recession, signaling that restoring confidence. However, companies are still reluctant to invest in new equipment. The companies that reduce their cash holdings are more than those who increase last year, which happens for the first time since the economic recovery, […]

US Corporations

US CorporationsThe American corporations reduced cash holdings for the first time since the end of the recession, signaling that restoring confidence. However, companies are still reluctant to invest in new equipment. The companies that reduce their cash holdings are more than those who increase last year, which happens for the first time since the economic recovery, according to a new study of the Association for Financial Professionals (AFP) among corporate accountants. The tendency of companies to hold less cash is an important turning point in the recovery from the recession. It is a sign that “animal spirits” are returned to the US economy. It should be noted, however, that growth will not be hurried while money is not invested in new factories and equipment.

Surely that companies loosen their belts is a good sign, which shows confidence that business conditions in the medium term are good enough for the money spent can be recouped through the activities of the companies. The number of companies reporting growth in their cash balances against those registering a decline, falling to -4 percentage points in the third quarter. In the second quarter the index pointing +27 percentage points. The corporations continue to hoard cash since the recession ended. At the end of the second quarter in the non-financial sector were piled 2.58 trillion USD in cash and money market funds, according to the US Federal Reserve (Fed).

Although the study of AFP shows that corporations feel less need for a large cash buffer in the bank, they are less likely to invest their money in pursuit of an economic activity. Instead, the money spent on acquisitions or redemptions of shares, although there is evidence of increased capital expenditures. The net redemptions of shares maintain an annual rate of almost 400 billion USD over the past few years, with acquisitions activity also increased in recent quarters. Fed survey among bankers showed similar trends with a slight increase in demand for loans, primarily to fund acquisitions.

The recovery of investments after the crisis is slow, and investment in non-residential property with only 5% higher than in 2007. This is one of the main reasons for the slow economic recovery, despite high corporate profits.

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