Business Spending Might Be The Answer

Back in August, I posed the question of whether businesses or consumers would lead the recovery. Since unemployment is so high, and it tends to lag other economic improvement, I find it hard to believe consumers will be the answer. But businesses seemed to be cutting back and having trouble of their own. With so many rosy third-quarter earnings reports, and the stock market soaring, the picture today looks different. Business investment appears to be a clearer answer for recovery.

That post from August I just mentioned had the Wall Street Journal proclaiming that business wouldn't lead the U.S. out of recession, noting:

But after the 2001 recession, businesses accumulated cash, rather than spending it, because of the spending glut during the tech boom. They mightn't have much appetite for spending this time around, either.

But it looks like the Journal's got some egg on its face. Today, the it has an article that leads with:

Big companies that sell to corporate customers are growing more bullish about their prospects for 2010, a sign that a revival of business investment could buoy the sluggish U.S. economy in coming quarters.

And further:

An upturn in spending by businesses or indications that companies are raising investment plans would be significant. Business spending on equipment, software and structures accounted for 9.5% of U.S. economic demand in the second quarter -- far below the 68.2% accounted for by consumer spending but still a potential catalyst for recovery.

Here's a chart from WSJ that shows a better outlook for manufacturing, an important segment of business:

business expansion 2009-10.gif

The inventory picture is also optimistic. Orders are up and inventories are extraordinarily low. Check out this chart, also from WSJ:

inventories 2009-10.gif

This is all great news, but not altogether surprising, given what we've seen in the economy. Business have cut costs dramatically -- that's where the nearly 10% unemployment comes from. Meanwhile, they've been hoarding cash, so they have money to spend. The cherry on top is that their stock is likely trading better than it has in about two years 2007, given recent bullish gains in the equity market.

Business spending is exactly what should bring us out of this recession, in particular. It was consumer credit-driven. As a result, consumers really shouldn't try to pick up the slack, because their money is busy paying off their debt. Many don't have real cash to stimulate the economy.

Instead, businesses see cheerier prospects. So their investment will result in economic expansion. But that's not all. Their confidence will lead to their hiring again, lowering unemployment and providing consumers with more actual money to spend, further stimulating the economy. That's not to say unemployment will suddenly plummet, but if firms need to increase inventories and broaden their business, then hiring must follow.

It's important to note, however, this is merely a trend in the right direction. A renewed credit crisis or other negative economic shock could throw things back off course. But if no such gloomy fate is in store, then businesses may very well be paving the road to recovery.