Low cost of holding cash keeps more dollars under corporate mattresses

The psyche of the U.S. consumer seems to have weathered the impact of the global financial crisis better than those of Canadian corporate leaders.

The psyche of the U.S. consumer seems to have weathered the impact of the global financial crisis better than those of Canadian corporate leaders.

Five years ago, with the U.S. housing market collapsing and unemployment spiking, analysts suggested a whole new generation of consumers would become as frugal as their grandparents, who lived through the Great Depression.

But fast forward to September 2012, and U.S. consumer spending is nearly $413 billion, or 9% above the November 2007 peak of $378.9 billion despite unemployment hovering at 7.9% south of the border.

Canadian businesses haven’t shut off the taps on spending and investment since 2008. By the numbers, they are investing more than ever. However, they seem to be investing far more conservatively. A recent TD Economics report found corporate cash balances have increased almost 50% since 2007. While businesses have generally been increasing their pool of financial assets over the past 20 years, the financial crisis accelerated their need for security and liquidity. The report suggested companies boosted their cash reserves 10% more than they had in the past.

The result has been a 10% drop in investments in fixed assets, which now account for 40% of corporate savings, compared with 50% in the early 1990s. The bulk of the investment has been in real estate, which has grown about 7% per year since 2000.

The report warned that the desire for such assets threatens future productivity with investment in machinery and equipment (a key driver of productivity growth) growing by only 1% on average in the past 12 years.

Canadian business leaders have tended to be more conservative than their American counterparts. The report suggested once the Bank of Canada starts raising interest rates (which Governor Mark Carney had suggested would happen by the end of 2014), the opportunity cost of holding large amounts of cash would probably convince executives to put their money to work and thereby contribute more to the economy.

But with lower corporate profits on the horizon in the midst of a sluggish economy and global financial headwinds, it will likely remain a tough sell to get Canadian businesses to put their money to work sooner.

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