There's been one consistent glimmer of hope to hold onto over the last four years: Businesses have been hoarding a tremendous pile of cash -- more than $2 trillion! Once the economy gets moving and confidence returns, that cash can be put to work hiring new workers, raising dividends, building new factories, and what have you.
That was the theory, at least.
But as Ben Casselman of The Wall Street Journal points out, the Federal Reserve just revised down its estimate of how much cash American businesses hold.
By half-a-trillion dollars.
Here's the new reality:
Source: Federal Reserve.
It doesn't end there. The Fed also revised upward its estimate of the amount of debt nonfinancial companies hold by about $150 billion. Add the two together, and there's now a $650 billion swing in the balance sheets of American businesses compared with what we thought a few weeks ago.
What should you make of it?
First, companies probably still have a lot of cash. After the revisions, corporate cash equals 12.5% of total liabilities. At the height of the boom in 2007, cash made up 11% of liabilities. In 2000, it was 10%, and around 7% in the 1990s. Banks and households got way overleveraged during the 2000s, but nonfinancial businesses by and large did not. The argument that there's a lot of ammo to fund expansion once businesses feel the itch to invest is still valid, just not to the extent as before.
But, more importantly, the revision is a powerful lesson in the quality of economic data, and how many grains of salt need to be taken when reading these reports (lots).
Casselman explains why the revision likely took place: "The revisions appear to be the result of a combination of more updated data from the Internal Revenue Service, among other sources, and some methodological tweaks. The changes bring the Fed's data more in line with that of private firms, which had shown corporate cash reserves growing more slowly than the Fed."
Though this stuff plays right into conspiracy theorists' hands, I don't think there's any reason to be outraged here. When Microsoft (Nasdaq: MSFT) or Google (Nasdaq: GOOG) reports figures on their large cash hoards, those are audited figures that you should (reasonably) have faith in and expect to be exact. Numbers reported by the Fed are different. There are 27 million businesses in America. It's impossible to keep tabs on all of them. The only feasible way to way to report broad figures is to use small sets of data and then extrapolate the results. While this is standard business in the world of statistics, it's prone to error. As the Fed discloses in its reports: "Flow of funds statistics are subject to uncertainties resulting from measurement errors in source data, incompatibilities among data from different sources, potential revisions in both financial and nonfinancial series, and incomplete data in parts of the accounts."
None of this is new. In fact, the corporate cash revision is one of several major economic revisions over the last year that smashed widely held beliefs. A lot of people worried last year that consumers were stretching themselves too thin and depleting their savings. Then in February -- surprise! -- income and savings data were revised upward. A year or two ago, most analysts were jazzed about a big rise in worker productivity during the recession. Then -- whoops! -- productivity estimates were revised down sharply.
Revised reports are probably more accurate than initial figures, but who knows? Revisions just highlight how fragile these numbers are. Any economic report can, at best, show a trend -- not precise figures.
