Why Businesses Aren't Spending Cash

With trading being seemingly stuck between 1000 and 1200 or so, nobody is quite sure whether America, and the rest of the world, are pulling out of what has been the worst financial downturn since the Great Depression. One thing is for sure: individuals as well as companies are hanging on to their assets; cash in particular. So why are companies concerned about what's going to happen, and how does that impact the overall economy?

In order to come to a conclusion about where we're headed, it's important to understand where we've been. Why did the economy crash in the first place? Why has it been so slow to recover? Why haven't government incentives taken hold as well as we thought they would?

As most everyone knows by this point, the global financial collapse was due to a combination of things, but not only is the economy cyclical, the housing market was in an interesting position and banks found themselves in trouble pretty quickly.

Fast forward to the summer of 2010 and the global economy has been in trouble for over a year. The problem extends way beyond the borders of the ; some of the world's largest economies including Germany and China have been impacted.

Now that a good portion of the "bail-out funds" have been distributed, why hasn't the economy recovered more than it has? The largest drivers of the American economy, large corporations, have a lot of uncertainty, which doesn't bode well for spending cash. With lots of different pieces of legislation making their way through Congress recently, businesses aren't sure exactly what's going to happen in the next few months, let alone years. With that kind of uncertainty, it's hard for CFOs and CEOs to plan future activities. One of the biggest concerns of all US businesses is the health care legislation and what the implications will be. All different numbers have been thrown around so far, but some of America's largest companies are anticipating that the recently approved health care legislation will cost upwards of $1 billion, or in their thinking, take $1 billion away from their bottom line.

Businesses may also be concerned with the future of energy. With the emergence of solar and wind power, and the tightening of regulations with offshore drilling, corporations may be having trouble predicting how energy will impact them as well as the rest of the economy. The Gulf drilling moratorium itself threatens the whole Gulf Coast region, and may even extend beyond these states.

With all of these problems and risks, it becomes clear as to why companies are choosing to hold on to their cash. Time, and legislation, will tell when and how strongly the United States will come out of this economic downturn.

Resources:

Ben Dickey's Powerpoint Presentation: "Markets vs. Economy".