Economic Outlook n° 1187 | Special Report | The Reindustrialization of the United States
Euler Hermes
Cash hoard instinct: debunking the myth
Clearly the U.S. is falling behind in critical R&D programs. So how will the U.S. increase its investment in R&D spending? What policies can the federal government undertake to encourage this effort? An examination of current business practices reveals some possibilities.
▶ U.S. manufacturers have grown their profits rapidly over the past decade, largely due to increased productivity. Yet over the same period, manufactu- rers have increased investment much more slowly, and employment has actually fallen in the sector. Clearly, U.S. manufacturers need to resume a faster pace of investment to become more competitive in the global marketplace. Profits need to be re-distri- buted to promote investment Figure 29 below shows the growth in corporate and non-corporate business profits as a percentage of total assets. The rising profits are clearly evident here also, but this chart breaks the profits down into divi- dends and undistributed profits. It is evident that over the past decade, manufacturers have paid out divi- dends at approximately the same rate, but they have more than tripled the portion of profits which remain undistributed. Where have the undistributed profits been allocated on balance sheets?
▶ Figure 30 below shows the composition of the balance sheet of all corporate and non-corporate businesses. As shown by the blue line, contrary to
29. Distribution of profils as a % of assets 6% profits 5%
popular belief, corporations are not hoarding cash and other liquid assets on their balance sheets. The proportion of liquid assets as a percentage of total assets has barely budged from a low of 5.8% to a high of 7.3% to the current value of 6.4%. Instead, the undistributed profits went to pay down liabilities and to increase net worth. These efforts have occurred in two distinct periods. After the tech bubble burst and equity values plummeted, businesses began rebuil- ding net worth and paring down liabilities. Then the financial crisis started to emerge in 2007, drastically marking down the value of financial assets, lowe- ring net worth and increasing liabilities. After 2009, businesses once again undertook the task of resto- ring fiscal prudence to their balance sheets, reducing liabilities, and rebuilding net worth. The financial cri- sis and the great recession pushed businesses into the “risk aversion” mode to rebuild their balance sheets and make investment a secondary priority.
▶ The good news is that although this risk aversion strategy is still in place, it has been easing. Banks have started to make commercial and industrial loans again. Consumer confidence is on the rise. The hou- sing market may have bottomed, and employment has firmed in recent months, although it is well below the rate of job creation needed to bolster the ane- mic recovery. Expectations are that all of these trends will continue and that businesses will start to increase their risk appetite such that profits will be used less to bolster the balance sheet and more to increase investment.
◾◾◾ 30. Net worth, liabilities and liquid assets as a % of total assets 6%