Monday, August 28, 2006

Bloomberg: Business Spending May Languish

by Calculated Risk on 8/28/2006 02:12:00 AM

Last month I asked: Will Business Investment Rescue the Economy? I was not sanguine.

Here are some further thoughts on business investment from this Bloomberg article: Business Spending May Languish, Raising Risk of U.S. Recession

Forecasts of a moderate slowdown for the U.S. economy this year assume that businesses will accelerate their spending on equipment, helping compensate for any weakening in consumer demand. ...

"Most of the people forecasting a soft landing are counting on a boost from capital expenditures," says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. in New York. "I would be careful about that." She puts the odds of a recession at more than 50-50, "and it could happen relatively quickly."
Schwab sent me a recent forecast titled "Recession Watch". The piece made many of the same arguments, without the flair, of Nouriel Roubini.
"It makes little sense for businesses to accelerate their capital-spending plans at a time when final consumer demand, the largest source of demand, is decelerating," says Jan Hatzius, chief U.S. economist with Goldman Sachs in New York. "We have long been skeptical about the `handoff' concept."

New skeptics are being made too. Donald Straszheim, vice chairman of Roth Capital Partners LLC in Newport Beach, California, says he's reconsidered the prediction he made in December of a business spending binge.

"A business decision-maker would have to be blind not to see what's going on and be rethinking whether they ought to be a little more cautious over the next 24 months," says Straszheim.
The article presents some optimitic views on business spending, and then returns to the theme:
Only 21 percent of the firms in the Federal Reserve Bank of Philadelphia's August survey said they expect to increase capital spending over the next six months, the lowest percentage since January 2003. ...

"Capital spending among small businesses is pretty flat," says William Dunkelberg, chief economist at NFIB. "There's nothing really exciting happening there, either in terms of buildings or software and equipment."
And Paul Kasriel of Northern Trust asks the obvious question:
"If companies weren't on a spending boom earlier in the cycle, when consumer demand was soaring and their balance sheets were running over with cash, why would they suddenly go on a spending boom now?"
This makes sense, and historically residential investment leads nonresidential investment - either up or down. And residential investment is clearly falling. So a business investment boom is possible, but I wouldn't bet on it.