When a huge cash pile is scary

If you hack down your fixed costs faster than demand for your goods or services slumps, then you can not only protect your margin in a downturn, but you can even build up a pretty tidy pile of cash. And that is exactly what US companies did during the recession and now they find themselves sitting on a cashpile worth over 2.6 trillion dollars, according to my calculation using Valueline figures. Not to shabby a showing for the worst slump in generations.

Given the kind of cash that US companies now have to throw around, it’s hardly surprising that everyone allowed to speak to the financial press seems to be expecting an imminent boom in mergers and acquisitions (always a good hole to pour idle cash down), dividend increases or reinstatements and/or a return to the pre-crisis share buyback bonaza. These predictions will of course come to pass, afterall why let cash sit around at such miserly low interest rates as those that are now available.

But the huge cashpiles sitting on corporate America’s books are also indicative of something else. Managers are still shellshocked and scared as hell about the economy. If they thought that there was more to the recovery than a just a inventory rebuild, which has been going on for the better part of nine months now, then they would be plowing their cash into M and A, dividends and buybacks. But the fact they aren’t yet indicates they remain jittery and want to have a cash cushion around if things get ugly again.

A tale of two economies

Compelling evidence that the US economy has entered a sustained and sustainable recovery stubbornly refuses to be forthcoming. Instead, a trickle of data stubbornly just keep suggesting that the much of the improvement in the recession-weary US economy is coming from a companies restocking inventories they ran down to the ground as demand from shell-shocked consumers evaporated during the worst of the financial crisis.

Last week, the release of data showing the strongest quarterly growth in six years — a not-to-be-sniffed-at 5.7 percent — proved to be largely the result of an improvement in inventories. Likewise, this week’s ISM survey paints a similar picture, showing the manufacturing sector, which benefits most from inventory rebuilding, riding high while the services sector is still struggling.

A rebound in inventories is the normal course that recoveries take in their infancy. However, consumers have to start buying and services have to start, well, servicing if the recovery is to become more entrenched. But consumers remain wary for their jobs (if they have one) and are trying to pay down debt. Meanwhile companies, not only including service but also manufacturing companies, still have a tough time getting credit unless they are big enough to tap the bond market. It helps that companies have built up huge piles of cash which can allow them to grow to an extent in the absence of easier credit.

Despite the uncertain outlook, at this point there is little reason to fear a dreaded “double-dip” relapse back into recession unless data really take a turn for the worse, which they shouldn’t unless there is some unforeseen shock. However, there is also no compelling reason to expect the inventory rebound to quickly morph into a widely based economic upswing. So the 5.7 percent pop in economic growth might very well be the best the US can hope for at least for a while.