NEW YORK (AP) - Economists and the media keep talking about the fragile state of the consumer, but it might be time to look at how businesses are spending, too.
Construction of new plants, stores and more is growing at a brisk pace, factory orders are at six-month highs and corporate purchases of things like computers and software is slowing but not by much.
That's good news — as long as it lasts. The trouble is that spending could begin to fizzle fast. There are some temporary tax write-offs for equipment that run out at the end of the year and fewer new building projects are slated going forward.
How this shakes out in the coming months matters because of the widespread effect that corporate investments have on the overall economy. Private business investment contributes about 10 percent to U.S. gross domestic product but it also plays a big role influencing the labor market.
Already companies have been slashing jobs as they struggle with a faltering economy, soaring costs and tight credit conditions. New applications filed for unemployment benefits rose to 455,000 during the last week in July, the most since late March 2002 when the job market was struggling to get back on its feet after the 2001 recession.
Should the weak business climate spur companies to slow expansion drastically, that could further weaken the labor market. And if that were to happen, it could put more pressure on American consumers, whose expenditures fuel 70 percent of economic growth.
But we're not in that bad spot yet. We might not be for the rest of this year.
While debt-laden consumers have been limping along despite the U.S. government's economic stimulus program — which doled out $80 billion so far in extra income to many Americans in recent months — businesses haven't been curbing their investments in any significant way.
Spending on nonresidential structures rose at a 14.4 percent annual rate in the second quarter, according to the latest figures on GDP from the Labor Department. Order to U.S. factories also have risen, climbing 1.7 percent in June — the fastest pace since last December and more than double what economists had been expecting, the Commerce Department reported.
Purchases of equipment and software fell at an annual rate of 3.4 percent in the second quarter. Economists are expecting that to reverse in the second half of the year as companies take advantage of the tax write-offs for businesses under the U.S. economic stimulus plan, however. That lets companies buying new equipment in 2008 to depreciate an additional 50 percent of the cost of the assets placed in service this year, but the buying must be done before Jan. 1.
"A second half surge could come at the expense of what will be purchased next year," said David Wyss, chief economist at Standard & Poor's. "Those interested in buying equipment in the first quarter will push it back to the fourth quarter for the tax advantage."
Wyss also expects construction spending to start slowing going into next year as businesses wind down projects that they had planned when the economy was booming. Companies — especially those consumer-focused — may be more reluctant to commit to new stores or to build new factories given the state of the economy.
For instance, Whole Foods Market Inc. said last week that it would cut its fiscal 2009 store-opening plan to 15 from as many as 21 three months ago, and said it would halve capital spending not related to new store openings. The sluggish economy has weighed heavily on the Austin, Texas-based organic and natural foods supermarket chain, which reported quarterly earnings that came in below expectations.
Also watch what companies do with their inventories in the coming months. In the second quarter, businesses drew down their inventories by a surprising $62.2 billion, six times the level seen in the first quarter, according to the latest U.S. GDP report. That means they didn't expand their output, but let past production absorb any stimulus-check induced consumer spending, according to Merrill Lynch.
Businesses may also face weakening conditions abroad, which could hurt U.S. exporters that have enjoyed big gains from their global operations while the U.S. economy has waned. Real exports of goods and services rose at an annual pace of 9.2 percent in the second quarter, according to the Labor Department.
Corporate investments are still rolling along now, though the pace is slowing. The trouble is that companies could jam on the brakes any time.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org |