Tax Reform Not Enough To Convince Corporates To Spend, AFP Finds

Tax reform played a key role for several corporate successes in the first quarter of 2018. Most recently, Verizon, Freddie Mac and Publix all attributed the regulatory initiative to strong first-quarter performance, while TD Bank research published in March also found corporate treasurers to be widely optimistic about the Tax Cuts and Jobs Act introduced last year.

In its report, TD Bank found that 58 percent of treasurers said they were optimistic about tax reform’s ability to positively impact their companies; more than a third said they expect the legislation to positively impact their companies’ finances in particular.

“The Tax Cuts and Jobs Act implementation could cause businesses to have extra capital to deploy, but it is even more encouraging that organizations expect to have cash on hand through the normal course of business in the coming year,” said TD Bank’s manager of treasury management sales, Tom Gregory, in a statement at the time. “Together, these factors mean that companies could invest more funds, hire employees and generally spend on both their businesses and communities.”

However, the latest analysis from the Association for Financial Professionals (AFP) suggests businesses are reluctant to let go of that cash.

The AFP’s newest Corporate Cash Indicators report, released this week, found trade dispute concerns to be among the largest factors hampering U.S. corporates from spending their rising cash reserves.

Analysis found a significant increase in cash holdings among U.S. corporates both quarter over quarter and year over year for Q1 2017. AFP noted that these increases signal “some abatement of cautiousness among treasury and finance professionals in the past year.”

Forty-four percent of survey respondents held larger cash and short-term investment balances by the end of the first quarter compared to the end of Q4 2017. More than a third said their cash and short-term investment balances increased compared to a year earlier.

Nearly a quarter added that they plan to grow their cash and short-term investment balances over the coming quarter; slightly more, 25 percent, said they plan to reduce those balances, according to AFP’s analysis.

According to AFP president and CEO Jim Kaitz, these statistics suggest that corporates continue to hold onto “cautious optimism” and, despite stronger cash positions, are not yet ready to deploy that money.

“The optimism generated from corporate tax reform seems to have done little to persuade organizations to spend their cash during the early months of 2018,” Kaitz said in a statement. “The uncertainty stemming from threats of a trade war and geopolitical tensions have concerned treasury and finance executives. Washington must deliver on its promise of less regulation, alleviate uncertainty and ease geopolitical crises for businesses to regain their confidence in the economy and begin to deploy their cash.”

This reluctance to spend is a continuation of previous AFP reports that drew similar conclusions; last year’s Q2 report, for instance, found faster-than-expected cash accumulation among U.S. corporates, again attributing the trend to political gridlock and uncertainty.

The AFP again highlighted these tensions in its Q3 2017 report.

“Treasury and finance executives are clearly concerned over uncertainty in the domestic and global economy,” said Kaitz in a statement last October. “In response, they are performing their primary role as safekeeper of corporate cash, keeping their powder dry until they see a more optimistic economic landscape.”

Trade tensions have mounted since then, causing geopolitical and economic concerns to persist among corporate treasurers.

The threat of a trade war, particularly between the U.S. and China, has increased tensions with U.S. exporters. According to Statista data, the U.S. traded $2.19 trillion worth of goods in 2016 alone, with China playing a major role in that business: $60 billion worth of Chinese goods are at risk of a tariff increase from the U.S., the South China Morning Post said in reports last month.