For the first time in a long time, most economic signs are positive. Many public companies are reporting improved earnings, and industrial production is on the upswing.
In the markets, the S&P 500 stock index has returned to a level not seen since the financial crisis hit. And in Washington, President Barack Obama recently signed an $858 billion tax compromise worked out with congressional Republicans that extends the Bush tax cuts for two years and includes a number of additional stimulative provisions.
So, 18 months after the Great Recession officially ended, is robust recovery finally a sure bet? No.
Risk factors remain, among them the debt crisis in Europe, the still-weak U.S. housing market and an unemployment rate still uncomfortably close to double digits.
What could make a big difference now is a strong vote of confidence from the real driving force of the economy: business. For many companies, however, caution remains the watchword. Instead of pumping up investment and hiring, many firms have chosen to squirrel away their rebounding profits.
Indeed, the Federal Reserve’s recent flow-of-funds report for the third quarter showed non-financial companies sitting on a record stockpile of cash-more than $1.9 trillion, or 7.4 percent of total assets. That’s the highest level of corporate cash in 50 years.
For many businesses, a conservative cash strategy paid off over the past few years, and that helped prevent an even deeper economic plunge. But without resumed willingness by companies to invest and add staff, it will be difficult for the economy to gain altitude.
Harvard Business School finance professor Mihir Desai recently proposed a temporary tax on corporations’ "excess" cash to prod them into action. It’s hard to imagine the new Congress taking this step, and whether it even should is debatable.
However, cash-rich companies are likely to face increasing pressure from shareholders who want management to put the money to work-or from private equity firms hunting for acquisition targets.
The best reason to re-evaluate conservative cash strategies, though, might be the simplest one: With the economy poised for stronger growth, a bit of optimism could really pay off.
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