Business Investment Shows Life
By Jonathan Nicholson
Saturday March 16, 8:56 am Eastern Time
WASHINGTON (Reuters) - When Federal Reserve Vice Chairman Roger Ferguson sat down at a table full of manufacturing executives recently, he may not have been too encouraged by the wary business sentiment.
According to Tom Duesterberg, president of the Manufacturers Alliance/MAPI of Arlington, Virginia, where the roundtable took place a few weeks ago, the consensus among the approximately two dozen executives there was that business had indeed improved from the downturn seen after the Sept. 11 attacks.
Still, worries about how strong it would be in the future still held sway, as few of the executives said they expected to invest in new equipment any time soon.
``It's trust, but verify,'' said Duesterberg, recalling former president Ronald Reagan's aphorism about the Soviet Union during the Cold War.
That, in a nutshell, is the dilemma the U.S. central bank faces as it reassesses the economic outlook.
With the U.S. economy apparently well on its way to recovering from the recession that started in March 2001, the business side of the economy remains tentative. Having an excess of capacity, firms are wary about adding any more or replacing older equipment with the latest and most advanced versions.
Already, business investment has declined for four straight quarters, the first time that has happened since the early 1990s. The long boom that began in 1991 was led, many economists say, by businesses' willingness to invest in new and better equipment that in turn made their workers more productive and boosted bottom lines.
A reluctance to invest could hurt productivity down the road, and make it harder to raise living standards. Peter Fisher, Treasury's Under Secretary for Domestic Finance, said on Thursday it was ``crucial'' that business investment spending rebound in the second half of the year.
SIGNS OF LIFE
``There are reasons to be optimistic,'' Fisher said in a speech to the Futures Industry Association in Boca Raton, Florida. ``In recent months shipments of non-defense capital goods have been increasing. Also, the passage of the stimulus bill that was just signed into law by President Bush will provide significant new incentives for corporate investment.''
Another positive sign has been the recent uptick in business lending by banks. So-called commercial and industrial loans have rebounded in recent weeks, according to weekly data from the Federal Reserve.
However, on Friday the Fed, in its monthly reading on U.S. industrial production, reported that output of business equipment declined 0.4 percent in February. That followed a meager 0.1 percent gain in January.
``The production of industrial and other equipment has been choppy recently, but, on balance, has continued to slide,'' the Fed said in the report.
LINKED TO PROFITS
The rebound in business spending will likely come, analysts say, when companies have some money to invest -- that is, when profits return. That could be soon, they say.
``We have seen corporate cash flow start to improve,'' said Gary Thayer, chief economist with St. Louis-based A.G. Edwards & Sons.
However, Thayer said firms are likely to wait until they are convinced that final demand, the consumer, is back on track before laying out cash.
That may delay a rebound in capital spending until the second or third quarter of the year, he said.
Lynn Reaser, chief economist with Banc of America Capital Management, also in St. Louis, said the run-up in bank lending may have been more closely related to firms financing their inventories rather than expansion plans.
``They still seem to be holding on to the purse strings,'' she said of executives.
Still, Reaser said she thought the lull in capital spending was close to bottoming out. |
