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Corporate Cash Hoarding Accelerates — But Is There Room For Optimism?

There may have been a burst of optimism among the nation’s corporate community following the election of President Donald Trump, but that optimism appears to be waning, as businesses of all sizes take a wait-and-see approach to their finances.

Recent research from the National Federation of Independent Businesses found “frustration over gridlock in Washington” has diminished small business confidence. Now, new data from the Association for Financial Professionals (AFP) suggests the same is happening with mid-market and large corporate finance enterprises. According to AFP Vice President and Chief Operating Officer Jeff Glenzer, CTP, and Director of Survey Research Mariam Lamech, the acceleration of cash hoarding can have some adverse effects on the national economy.

The Association for Financial Professionals released its Corporate Cash Indicators report for Q2 this week, with data signaling faster-than-expected accumulation of cash among the nation’s companies. Researchers attributed the trend to political gridlock and regulatory uncertainty, forcing corporate finance companies to hold onto mounting piles of cash reserves.

“I don’t think we were particularly surprised, because we saw this trend starting last quarter,” explained Jeff Glenzer. “There was a brief period following the election where business leaders showed optimism that gridlock would be broken, and some policies that were viewed as business-friendly would gain some momentum.”

But AFP data from Q1 showed that optimism has waned, and as political gridlock continues, or even worsens, reluctance to spend continues.

“The cautiousness and anxiety, as the months go by, continue,” added Lamech, “and businesses are building up cash reserves very quickly. Going into the summer months, they’re not showing any signs of wanting to spend.”

The Q2 Corporate Cash Indicators Report revealed news that 41 percent of organizations said they held larger cash and short-term investment balances by the end of Q2 2017 than they did at the end of Q1. That’s compared to a quarter that said they reduced their cash holdings over the last three months.

Thirty-seven percent said their cash balances are higher now than they were this time last year, and nearly a third said they plan to expand cash and short-term investment balances in the coming quarter, too, according to the AFP.

Glenzer said the survey covers businesses in the mid-market range all the way up to some of the largest companies in the U.S., so there is a lot of cash hoarding. According to the executive, this means a lot of money that could otherwise be spent on investing in the national economy.

“If companies aren’t comfortable spending cash, it means they’re not hiring, they’re not investing in new factories, they’re not investing in modernizing their equipment,” he said, adding that “fear of the unknown,” both regulatory and geopolitical, are exacerbating the trend, as is a “lack of compelling economic opportunities for many companies.”

“If companies start deploying their cash, and if they do so efficiently, it can really drive accelerated economic growth,” he noted.

But according to Glenzer, that doesn’t mean finance corporates are in the wrong for stashing money.

“Our members are doing the prudent thing, which is to be cautious in a very uncertain environment,” he said.

“What I hope and wish for — though I’m not sure I really believe it will happen — is that the people who are making or not making the policies that would encourage companies to invest in growth will take this as a sign they need to act,” he continued. “They need to work together to move forward.”

Political risk is hardly a new concept for CFOs and corporate treasurers, he said. But it is one of the most difficult factors to handle.

“One of the things corporate finance professionals have the hardest time dealing with is uncertainty driven by political behaviors,” Glenzer said. “Finance professionals deal with risk every day; that’s what they do. But the type of risk that flows out of Washington is not the type of risk that is easy to manage.”

The AFP isn’t the first company to note the impact political gridlock has on the health of U.S. companies, nor are they the first to point out the wait-and-see approach businesses tend to deploy these days. But both Lamech and Glenzer said there can be some good to come of this.

For Lamech, the data may be helpful to CFOs and treasurers to understand that they are not alone in their practice of building up cash reserves.

“It’s an indicator to say, ‘See, there are others like us in the same boat,’” she said. “That may bring some comfort.”

On an even broader scale, the cash hoarding data could actually be cause for optimism, added Glenzer.

“I think there’s great opportunity in this data as well,” he said, “in the sense that if Washington both on the legislative and regulatory side can start addressing some of these issues and [can start] giving a higher degree of certainty about the future of things like taxes, there is a great amount of capital that can be unleashed to really accelerate economic growth for the good of the economy.”

“The negative side to this is they aren’t doing that en masse,” he continued. “Yet, the positive side is there is a great reward waiting at the end of this if we show some positive movement on the legislative and regulatory front.”

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