Businesses Hoard Cash, Still Borrow

Another quarter, another record corporate cash hoard.

Holdings of cash, deposits and money market fund shares accounted for 5.9% of nonfinancial corporate assets in the third quarter. That was higher than at any other point in more than 50 years (see the first chart). It broke the previous record set in the second quarter, and the record before that, which was set in the first quarter.

The image of miserly corporations can be misleading, however. Firms have been borrowing, and borrowing from banks as they’ve restocked inventories. In fact, business borrowing has been the sole source of growth for bank loan portfolios as books of commercial and residential mortgages and consumer loans have continued to flatline or atrophy.

An important caveat to the seemingly inexorable climb in ratios of cash to assets is that much of it has been caused by the crash in property values. The share of corporate assets made up of real estate at market prices fell by about 4 percentage points from the first quarter of 2007, to about 29% in the third quarter of this year (see the second chart), pushing up the representations of other assets, according to the most recent data published by the Federal Reserve.

Caution is apparent in ratios of cash to total corporate borrowing, which remain high by historical standards (see the third chart) and suggest that businesses are maintaining large amounts of liquidity in case credit markets seize up again.

Even under this perspective, however, cash levels could be explained to some extent by low rates that reduce the incentive to move into interest-paying investments.

Indeed, firms have been borrowing heavily, mostly by taking advantage of low rates and issuing corporate bonds, which have increased by about 50% since the end of 2006 to about $4.8 trillion outstanding in the third quarter (see the fourth chart).

Moreover, year-over-year growth in corporate borrowing from banks returned to positive territory this year, following a buildup in corporate inventories (see the fifth chart).

Nonetheless, businesses actually shrank inventories in the third quarter, in an apparent hair-trigger response to anemic household consumption in the second quarter. Reports so far this quarter suggest that firms are once again restocking, but the weakness during the summer is a stark reminder of how quickly the outlook for corporate lending can change.