Here's a picture that I have been watching for awhile.
It was also the subject of an article in Sunday's New York Times (which my colleague John Carlson brought to my attention). Here's the fact.
... instead of investing, corporate America has been accumulating cash - big piles of it. According to the most recent figures from the Federal Reserve Board, nonfinancial corporations increased their liquid assets by 20 percent, to a record $1.3 trillion, from the start of 2003 to June 2004.
The question, of course, is why? The article cites one high-placed source:
[Vice Chariman of the Board of Governors of the Federal Reserve System Roger] Ferguson said the cash buildup was a troubling sign of weak confidence.
"Given the current low interest rates, the preference for holding financial assets over expanding operations suggests that businesses lack confidence in the future profitability of their potential ventures," he said. Factors like high oil prices, international tension, immense budget deficits, high consumer debt and stretched consumer budgets could be weighing on decision makers.
The article then asks the 1.3 trillion dollar question.
With so much potential sitting idle, can anything be done to encourage wise business investment?
One solution, tax incentives, gets something less than a thumbs-up.
Two economists at the University of Michigan, Christopher L. House and Matthew D. Shapiro, recently studied the policy and found that while the accelerated depreciation rates did bolster spending on long-life assets, the effect on the overall economy was not large.
They calculated that the policy might have increased output by 0.1 percent over all and resulted in 100,000 more jobs. As the policy expires at the end of this year, those gains could shrink. In any case, government incentives have their limits. "A firm isn't going to want to install capital, even if it's cheap, if it can't use it in the future," Professor Shapiro said. "If people come to expect we'll have a relatively strong economy over the next few years, that will be more important than any of these tax changes."
In the end, this sounds a lot like Mr. Ferguson's interpretation. When businesses believe the economy is getting better for good, they will spend the cash. Fostering the conditions that justify such optimism is the best policy can do.
If you have an alternative take, I invite you to post it in the comments section.