The huge amount of cash sitting on corporate balance sheets has fueled debate since the credit crisis. The extent of companies’ cash holdings has been cited as proof that companies weren’t doing enough to get the economy going, that they were handicapped by excessive regulation or that they preferred to hoard money overseas rather than pay taxes to repatriate the it. But last week, the latest quarterly data from the Federal Reserve suggested that noteworthy build-up in companies’ cash holdings might not have occurred.
According to the Fed’s flow of funds data, U.S. nonfinancial corporations had $1.74 trillion in cash at the end of the first quarter, up from $1.72 trillion at the end of 2011. But that year-end total was revised down from the $2.2 trillion the Fed reported originally—a change of $497 trillion.
The Fed also slashed the amount of cash companies have in checking deposits, revising its total for the end of 2011 to $379.8 billion, down from $672 billion, a change of $292.2 billion. In the first quarter, companies’ cash in checking deposits was almost unchanged from that revised year-end figure, at $379 billion.
Anthony Carfang, a partner and director at consultancy Treasury Strategies in Chicago, questions the accuracy of the revised data and notes that the statistics about corporate cash play a big role in some current policy debates.
“There’s so much pressure on corporate treasurers as a result of the publicity that was caused by what appeared to be high amounts of corporate cash,” Carfang says. “According to these latest Fed numbers, there isn’t any excess corporate cash. We’ve got to get this right—either cash is at unprecedented high levels and is a drag on the economy, or it’s not.”
The revised Fed numbers show “corporate cash as a percentage of U.S. GDP has been in a fairly narrow 10% to 12% range since about 2004, and the current number, 11%, is right smack in the middle of that range,” he says. “That would indicate there has not been an excess accumulation of cash.”
Carfang argues that the downward revision is far too large to be explained by a pick-up in companies’ investments in equipment or technology. He also notes that companies have been issuing long-term debt recently in response to historically low interest rates, a factor that would boost corporate cash rather than decrease it.
A Fed spokeswoman said the flow of funds data are revised “when new source data become available that warrant such a change.”
The Fed’s report says changes to the flow of funds accounts reflected “regulatory filing changes for U.S.-chartered depository institutions,” and the statistics on assets of nonfarm nonfinancial businesses “have been revised from 2010:Q1 forward, to reflect advance data from the Internal Revenue Service (IRS) Statistics of Income (SOI) for 2010.”