While the American economy teeters on the brink of recession, industrial companies in the S&P 500 hold almost $615 billion in cash and cash equivalents.This compares with $352 billion in 2001 and $95 billion at the time of the 1990-91 recession. These companies have also reduced short term debt and cut inventories to record low levels in relation to sales, all of which makes them strong enough to withstand a mild recession. Both, former Fed chief Alan Greenspan and the present chief Ben Bernanke are at pains to emphasize that except for the housing industry and the credit market the economy is in fairly good shape.
This also implies that these companies could stimulate the economy now by going on a hiring and spending spree, or they could distribute a part of the cash as extra dividend, boosting the spending power of the public. The most positive aspect of this development is that these companies are unlikely to be impacted by today's tightened credit environment.
Various reasons have been given to explain this phenomenon. Increased globalization has increased the risks of doing business, be it currency risks, political risks or even new competition. To protect themselves against such risks companies have simply opted to hold more cash. Contributing to this trend is the growth of specialized companies or 'pure plays' and the falling out of favor of diversified companies. Such companies feel more insecure than their well diversified counterparts. Companies nowadays also have less of their cash blocked up in inventories and faster payment systems have reduced levels of receivables. Although the health of these companies in no way ensures that the economy will recover quickly, they are in a very good position to survive the present crisis.