Businesses of all shapes and sizes have faced economic headwinds since the onset of the Great Recession in late 2008. Obstacles to growth have been myriad, including tightened credit markets, weakened momentum in Asia, the ongoing Eurozone crisis, and near-zero interest rates.
The combination of these and other issues has compelled America's CFOs to sit on their massive cash reserves. It was a reasonable response to the environment, and it resulted in the hoarding by corporate America of around $1.5 trillion in cash—equivalent to approximately 10 percent of the nation's GDP. In fact, even as the economy has shown marked improvement, many businesses remain fearful that if they open the spigot on their reserves, a new crisis might emerge and cause a new liquidity crunch.
At a macroeconomic level, it's a troubling cycle that has impacted the global economy. From 2010 through late 2013, as businesses stockpiled cash reserves, they also tamped down any expectation of job growth or robust economic expansion. By not spending, companies are failing to engage in the activities that could, at least theoretically, spur a strong recovery in the U.S. and perhaps even the world economy. The reluctance to put cash toward either capital expenditures or human capital (hiring) has convinced the Federal Reserve to extend its record-low interest rate environment through at least the middle of this year.
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But cash hoarding is a pattern that can't, and won't, last. Today, despite the occasional downward blip in statistics, the U.S. economy continues to strengthen. Most companies have recovered from the depths of the financial crisis; in most industries, corporate earnings now exceed their 2008 level. There are still plenty of global growth concerns, including the ongoing issues in Europe. Yet both financial markets and the Fed are indicating a belief that the worst of the financial storm is behind us.
2015 is shaping up to be the year of adjusting to "the new normal." The heady pre-2008 days of free-flowing liquidity won't be making a comeback, but a number of factors are motivating companies to significantly draw down their excessive cash reserves.
We expect this year to see a mind-set of fiscal constraint coexisting with an increase in strategic spending. Savvy companies are looking at opportunities to increase market share, drive revenue enhancements, and expand their business and their product lines in a way that clearly supports corporate strategy. As a result, we expect U.S.-based businesses to reduce their cash reserves by 10 percent to 15 percent by the end of the year.
The major catalysts of increased corporate spending this year will be:
Hiring. A major catalyst that we expect to spur corporate spending is the improving hiring picture, with its resultant impact on consumer sentiment. Through February, the U.S. economy added more than 200,000 new jobs every month for a year. March broke with the trend, adding only 126,000 jobs, but we're still in the longest hiring spree since 1995.
This may mean businesses have to pay more in benefits and salaries to compete for top talent, but the increased costs will be more than offset by the increased spending of more confident consumers. To wit, The Conference Board's Consumer Confidence Index, which increased in December, rose sharply in January, fell a bit in February, and rose again in March. The index now stands at 101.3, up from 93.1 in December 2014. As a result of the improving economy and rising consumer confidence, we expect U.S.-based businesses to increase staffing on both a permanent and a project basis, with an emphasis on the latter.
Of course, one can't discuss the hiring picture without factoring in the impact of healthcare costs on a company's bottom line. According to a recent Wall Street Journal article, corporate healthcare costs are slated to increase by more than 10 percent in 2015, for the third year in a row. Cardiovascular disease, cancer, and diabetes are expected to surge within the aging global workforce.
The same article cites an Aon Hewitt survey indicating that the projected 10 percent increase is more than double the expected inflation rate. And it stresses that Aon estimates the annual cost of care in the U.S. is between $10,000 and $12,000 per person, compared with $1,500 to $2,000 in Canada. While we expect corporate healthcare costs to be a drag on companies' spending of their cash reserves in 2015, we believe that increased hiring and the resultant strengthening of the economy will more than offset healthcare costs' impact.
Oil. The declining price of oil will continue, in the mid term, to leave companies with more money for capital expenditures and other investments. A thorn in most CFOs' sides several years ago, oil has spiraled downward, and a recent Bloomberg article suggests lower oil prices are here to stay. The oil market is experiencing a production glut created partially by the U.S. shale revolution and partially by OPEC's refusal to cut output.
As oil prices decline, businesses spend less on manufacturing and other energy-consuming endeavors, while consumers have more discretionary income and in turn can purchase more goods and services. Oil drillers and their suppliers may reduce capital spending in the short term when prices remain low, but the majority of industries should benefit from access to cheap oil.
Dollar. The strong U.S. dollar is another major factor to consider. As the dollar continues to strengthen and prices of prospective foreign merger and acquisition (M&A) targets fall for U.S. businesses, overseas acquisitions become more attractive. U.S.-based companies should look for new opportunities to increase revenues and fortify their competitive position both within the United States and abroad. For CFOs considering M&A, improving margins and increasing market share should be top priorities. For similar reasons, a strong dollar may mean the time is right for U.S.-based businesses to invest in and develop new products in foreign markets. While there might be a shortage of opportunities in wholesale acquisitions, we believe there will be targeted, industry-specific areas to strengthen a business.
Cybersecurity. A final catalyst of falling cash reserves—but certainly not least important; in fact, this should be the number-one priority for most businesses in 2015—is the recent glut of data and information security breaches impacting corporate America.
Business behemoths including Anthem, Home Depot, Target, and Sony have been embarrassed recently by major data breaches. The Sony breach might be the most publicized, given the alleged involvement of North Korea, but each of these events highlights not just a security concern, but also a black eye for the affected company. It's a simple fact that consumers and business partners will re-evaluate their options if a company they trust falls victim to a data breach. Thus, we expect spending on data security, data management, and IT in general to be top-of-mind for America's CFOs this year.
In PWC's The Global State of Information Security Survey 2015, nearly 54 percent of respondents indicated that they're prioritizing mobile-security strategy, with 40 percent believing device encryption and strong authentication of devices are crucial approaches. These numbers support the thesis that there is no quicker way for a business to lose market share than via a data breach. This holds especially true for publicly traded companies.
Reducing Cash Reserves
We expect these catalysts to drive U.S. companies to draw down their cash reserves by 10 percent to 15 percent by the end of 2015. They will face challenges, such as increasing corporate healthcare costs, growth at the "new normal" pace, and unforeseen events. But overall, 2015 should be a strong year for U.S. businesses and the economy, leading to increased corporate spending and reduced cash reserve levels.
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William Fink is the executive vice president, chief lending officer, and head of credit management for TD Bank's Regional Commercial Banking Group, where he supervises the Bank's $50 billion-plus commercial and small business portfolios. A Certified Public Accountant, Certified Specialist in Management Consulting, and Global Certified Management Accountant, he developed and teaches two programs for the University of Pennsylvania Wharton Small Business Development Center, as well as four continuing professional education programs for attorneys and CPAs at Penn State University—Abington Campus.
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