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The Economy Is Humming, but Finance Executives Are Singing a Different Tune

The United States economy is in solid shape. Retail sales are up and unemployment is down. Gross domestic product rose 4.1 percent in the first quarter of 2018, the biggest jump since 2014.

That’s music to the market’s ears. But finance executives are singing a different tune.

According to the July 2018 AFP Corporate Cash Indicators® report, U.S. companies accumulated cash in the second quarter of 2018, albeit at a slightly slower pace than they did in the previous quarter. It seems the strong domestic economic data may have instilled some confidence in business leaders, but not enough to encourage them to reduce their cash holdings at a significant rate.

The CCI is a quarterly survey that asks finance executives how they are managing their organization’s cash and short-term investment portfolio. According to the survey of 144 finance executives from U.S. businesses, the quarter-over-quarter index reading decreased 13 points in Q2 2018 to +5, showing that cash balances are accumulating at a slower pace than in the previous quarter. The year-over-year indicator decreased only one point to +16, signaling slightly less cautiousness among finance executives in the past year.

Fig. 1 CCI Year-Over-Year Indicator at +16

Source: Association For Financial Professionals

This desire to hold onto cash reserves is part of a larger trend in cash accumulation. More than a third of organizations (34 percent) held larger cash and short-term investment balances at the end of Q2 2018 than they did at the end of Q1 2018, while 29 percent reduced cash holdings in the past three months. Forty percent of organizations had greater cash and short-term investment balances at the end of Q2 2018 than they had one year earlier, while 24 percent held smaller cash balances relative to a year ago.

Finance executives anticipate holding onto their cash reserves through the summer. The forward-looking CCI indicator, measuring expectations for changes in cash holdings in the third quarter, increased 4 points from their predictions last quarter to a reading of +3. A quarter of organizations anticipate expanding cash and short-term investment balances over the next three months, while 22 percent plan to reduce these balances.

Fig. 2 CCI Forward-Looking Indicator at +3

Source: Association For Financial Professionals

A variety of factors could explain this desire to stockpile cash and short-term investments. First, interest rates are steadily rising, ensuring a better return on short-term investments with little additional risk. Second, the “Trump bump” that lifted finance executives’ optimism for corporate tax reform after President Donald Trump’s election has dissipated with the passage of legislation. Finally, trade wars could adversely affect businesses, convincing finance executives to spend cautiously.

So what are finance executives spending corporate cash on? Individual comments to the CCI indicate they are paying down debt:

“We are actively paying down acquisition debt.”

“We use excess cash to repay revolving debt, leaving minimal cash available for investment.”

“Net borrower so excess cash used to repay revolver.”

“We are deleveraging, so using excess cash to retire debt.”

The bottom line is that while the U.S. economy may be on solid footing, treasury and finance executives are not overly impressed by the data. Even a generous corporate tax cut and strong incentives to repatriate foreign holdings cannot seem to shake significant capital expenditures loose.

For the time being, it’s the same old song for U.S. finance executives.

James A. Kaitz

President and CEO of Association for Financial Professionals @JKaitzAFP

Jim Kaitz is president and CEO of AFP, an association that represents over 16,000 treasury and financial professionals located around the world. He was formerly executive vice president and chief operating officer of Financial Executives Institute, a professional association of over 14,000 senior financial executives representing 8,000 companies in the United States.

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