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In an address to the Chamber of Commerce in Washington, D.C., on Feb. 7, 2011, President Barack Obama implored business owners to start investing and hiring. And, he said, they've got plenty of cash on hand to do it.
"So if I’ve got one message, my message is now is the time to invest in America," Obama said. "...Today, American companies have nearly $2 trillion sitting on their balance sheets. And I know that many of you have told me that you’re waiting for demand to rise before you get off the sidelines and expand, and that with millions of Americans out of work, demand has risen more slowly than any of us would like.
"We’re in this together, but many of your own economists and salespeople are now forecasting a healthy increase in demand," Obama said. "So I just want to encourage you to get in the game."
We're checking Obama's claim that "American companies have nearly $2 trillion sitting on their balance sheets."
We asked the White House press office where Obama got the statistic, and they pointed us to a Dec. 10, 2010, story in the Wall Street Journal, which ran under the headline, "Companies Cling to Cash."
"Corporate America's cash pile has hit its highest level in half a century," wrote Justin Lahart.
"Rather than pouring their money into building plants or hiring workers, nonfinancial companies in the U.S. were sitting on $1.93 trillion in cash and other liquid assets at the end of September, up from $1.8 trillion at the end of June, the Federal Reserve said Thursday. Cash accounted for 7.4 percent of the companies' total assets — the largest share since 1959.
"The cash buildup shows the deep caution many companies feel about investing in expansion while the economic recovery remains painfully slow, and high unemployment and battered household finances continue to limit consumers' ability to spend."
The Wall Street Journal got its numbers from a Federal Reserve "flow of funds" report issued on Dec. 9, 2010.
The figures come from a section on "Nonfarm Nonfinancial Corporate Business" (Table L. 102); specifically, Line 41, "total liquid assets." In the third quarter of 2010, the liquid assets came to $1.93 trillion, up from about $1.5 trillion in 2005 and 2006. You can check out the footnotes for a detailed explanation of what all is considered a liquid asset, but it includes cash and money market and mutual fund shares.
As always, there are lots of ways to slice the data.
As a result, Satya Thallam, director of the Financial Markets Working Group at George Mason University's conservative Mercatus Center, cautioned not to place too much stock in the absolute precision of Obama's number.
"If you break out financial assets by category, into say liquid and less liquid assets, you can pretty much create any number you want, because '$2 trillion sitting on their balance sheets' is imprecise," Thallam said. "For instance, if you use checkable deposits, time and savings deposits and money market funds for both categories of business, you get $2.3 trillion."
We spoke to two other economists who preferred to cite a different category of businesses, "Nonfinancial Business" (Table L. 101) instead of "Nonfarm Nonfinancial Corporate Business" used by the Wall Street Journal. In the third quarter of 2010, the liquid assets for nonfinancial businesses was $2.4 trillion; up from just over $1.9 trillion in 2005.
Although experts may differ on which category to highlight, it was perfectly reasonable for the Wall Street Journal to cite the category it did.
More important, though, is that Obama's statement implies companies are sitting on a full $2 trillion that could be immediately invested in business expansion. And that's not right.
"Much of this money is already committed -- it must be used to pay wages, suppliers, rent, utilities, etc.," said Dean Baker, co-director of the liberal Center for Economic and Policy Research. "But, there is little doubt that companies have a great deal of cash sitting around that they could use to invest, if they wanted, even if $2 trillion is more than a bit of an exaggeration."
It's crucial, said Brian Bethune, an economist at IHS Global Insight, to "normalize" the figure. In other words, how much in liquid assets did businesses have on hand back when things were going relatively well?
In the category Obama cited, liquid assets came to about $1.5 trillion in 2005 and 2006. That's a good indicator of normal levels, Bethune said.
Obama's statement suggests companies have about $2 trillion in cash they aren't using, he said, "and that's not really the way to look at it."
"Companies have to have a certain amount of working cash to meet payroll and other business expenses," Bethune said. "By some measure, that's excess cash. But that's a major distortion. It's not like all of a sudden there is free cash sitting around."
Still, no matter how you slice the data, the Federal Reserve statistics show that companies are holding on to much more cash and liquid assets than they have in years past, so Obama's broader point is valid. It was also presented in general enough terms -- "$2 trillion sitting on their balance sheets" -- that it is defensible as an accurate figure. But to the extent Obama's statement implies companies could readily invest that entire amount of money, it is misleading. Less the amount needed to meet regular business expenses, the amount on the balance sheet that could be used to invest in business expansion (including hiring new workers) is actually much smaller. And so we knock Obama's statement down a notch to Mostly True.
White House website, Transcript: Remarks by the President to the Chamber of Commerce, Washington, D.C., Feb. 7, 2011
Wall Street Journal, "Companies Cling to Cash," by Justin Lahart, Dec. 10, 2010
Federal Reserve, Flow of Funds report, Dec. 9, 2010
E-mail interview with Dean Baker, co-director of the Center for Economic and Policy Research, Feb. 9, 2011
E-mail interview with Satya Thallam, director of the Financial Markets Working Group at George Mason University's Mercatus Center, Feb. 10, 2011
Interview with Brian Bethune, an economist at IHS Global Insight, Feb. 9, 2011
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