U.S. corporations are sitting on a huge and growing pile of cash. It just crossed the $2 trillion threshold, according to new Fed data.
This buildup is often explained as a response to the financial crisis and the recession. If a company thinks the wheels might come off the economy next week (or next month, or next year), it makes sense to keep a lot of cash in the bank, rather than rush out to build new factories and hire more workers.
But if you take a longer view, it's clear that there's more to the story than that. Companies' cash holdings have been growing for decades, in both absolute and relative terms.
Here's what it looks like in absolute (nominal) terms:
And here's what it looks like in relative terms, with cash holdings shown as a percentage of total assets (for all nonfarm, nonfinancial businesses):
There are several reasons for the long-term buildup of cash, according to Rene Stulz, an economist at Ohio State University who has studied this issue.
The business landscape became less stable. This predates the recession by decades. Over many years, cash flow grew more volatile for U.S. companies. In other words, the amount of money companies had coming in every quarter became increasingly irregular and unpredictable. As companies became less sure of how much money they'd have coming in, they socked away more cash as a safety cushion.
Factories' role shrunk. Old-school industrial companies could use their factories and other hard assets as collateral to borrow lots of the money they needed to invest and grow. But over the past few decades, the U.S. economy has shifted away from heavy industry and toward companies that rely more heavily on R&D and intellectual property
Inventories declined. Companies tend to hold less inventory than they used to. So at any given time, less money is tied up in inventory and more is held in cash.
This long-term story explains a lot. But there are a few wrinkles.
For one thing, the runup in cash holdings actually stalled out before the recession — around the end of 2004. Then it jumped back up again after Lehman went bust.
So is what we're seeing now the resumption of the long-term trend, or is it something new?
Stulz told me he's still studying that question. But he suggests that we may be seeing a new chapter that's connected to the older story.
"If you think of the long-term trend, part of it that had to do with an increase in uncertainty at the firm level," he said. "Obviously, the crisis led firms to feel very uncertain."