Nov 8, 2019

Businesses are stocking up for an expected downturn

Dion Rabouin, author of Markets

Illustration: Eniola Odetunde/Axios

U.S. companies are holding off on major purchases and investments, paying down debt and stacking up cash as they look to position for an expected economic downturn in 2020.

Why it matters: Firms are trying to protect themselves from a recession, but their spending pullback could weaken the overall economy — and potentially help precipitate the very conditions they fear.

  • Business investment has fallen for six months straight and declined by 3% in the third quarter, the largest drop since 2015.
  • The retrenchment by businesses helped turn Wednesday's U.S. workforce productivity report — a key economic metric that compares goods-and-services output to the number of labor hours worked — negative for the first time in four years.

What's happening: A slew of traditional recession indicators have shown up: The yield curve has inverted, the manufacturing and housing sectors have weakened, and income inequality has spiked to the highest level on record.

The big picture: U.S. corporate balance sheets are holding more than $2.2 trillion in cash, according to the latest figures from global accounting firm PwC. It's the highest number in decades.

  • Companies have added to their holdings since that survey and are "absolutely" getting themselves prepared for the downturn, PwC's U.S. deals leader Colin Wittmer tells Axios.
  • "They're building cash reserves in their balance sheets like we haven't seen in a long time. There's just an incredible amount of cash there."

Investors also are getting ready for the good times to end.

  • Data from the Investment Company Institute shows that even though the stock market has risen by nearly 25% this year, investors have been net sellers of stocks, pulling $100 billion out of equity funds.
  • They've moved more than $3.5 trillion into money market funds, which are essentially savings accounts; it's the highest level since 2009.

On one hand: "All the preparation for the end of the cycle could forestall the end of the cycle," John Bilton, JPMorgan's head of global multi-asset strategy, tells Axios.

On the other hand: There are still risks, particularly the rising level of debt, which could portend a bubble.

  • "We don't have overbuilt houses, we haven't overdone capital spending. There's no boom, so hard to get to a bust," JPMorgan Asset Management's chief global strategist David Kelly adds.
  • "I do think it gives a stability to the real economy, but I don't think it lends a further stability to the financial side of things, necessarily. It's a more complicated story."

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