Companies Stockpiling Cash, Protecting Balance Sheets, But Hampering Economic Recovery

 

Nonfinancial corporations grew holdings of liquid assets 25 percent over the past two years to $1.84 trillion, the highest level on record. This trend reflects efforts by companies to protect balance sheets and reduce their reliance on credit markets for future growth. Some corporations have begun to use built-up cash for stock buybacks, but until more sidelined capital is invested in the broader economy, the recovery will remain choppy, and risks of a double dip will persist. The consumer sector, which accounts for 70 percent of GDP and typically drives expansion during the early stages of recovery cycles, will remain strapped by high unemployment, minimal income growth and tight credit markets for several quarters to come.

  • Productivity soared in recent quarters, but businesses have stretched existing resources to their limit and will soon need to hire. During the year ending in the first quarter of 2010, output per hour climbed 6 percent, the most significant increase in eight years. Compensation declined modestly during the same 12-month period, contributing to stronger corporate profit margins. Pre-tax corporate profits in the first quarter climbed to 13.7 percent of gross domestic product (GDP), up from 9.6 percent of GDP one year earlier.
  • While several indicators point toward the resumption of moderate employment growth this year, lingering corporate caution poses a significant risk to the onset of a sustainable recovery. After cutting costs and slashing payrolls to survive the recession, many companies remain hesitant to shift out of conservation mode. Based on the results of a recent survey, most corporate finance executives plan to maintain or increase cash holdings over the next six months. If this occurs, the business sector could inadvertently set into motion another self-perpetuating downturn.
  • Impact on Commercial Real Estate

  • With the recovery expected to progress at a moderate pace through the second half of 2010, office vacancy should begin to stabilize by year end at approximately 18 percent. Even if companies ramp up hiring in the near term, however, it may be several quarters before vacancy rates recede. Many markets amassed significant amounts of shadow vacancy through the recession that will need to be filled before companies increase space needs.
  • The industrial property sector stands to benefit from strengthening international trade and modestly higher retail sales. Following the drastic correction cycle of 2008 to 2009, companies need to increase inventories to meet even modest demand levels, a trend that began to unfold in the first quarter. Furthermore, the corporate sector faces significant pent-up demand for equipment after several years of conservation. As capital spending gains traction this year and commercial development remains minimal, industrial vacancy will level off. During 2010, vacancy is forecast to rise just 40 basis points to 13 percent, following a 200 basis point increase last year.
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