Confidence Man

GDP growth is rising, albeit at a mediocre 2%, but it’s at least going in the right direction. Consumer debt (mostly credit cards) is reflecting an increase in consumer confidence; they’re willing to start buying again. The unemployment statistics are moving steadily in the right direction, and while we are a long way from out of the woods, the economy is beginning to look a bit more sustainable. People are hoping the European debt crisis doesn’t take us down but are definitely feeling better about what is happening here.

You’d think that all this relatively good news would prompt corporate America to hire at a faster rate, invest in updating equipment and generally respond to these nascent growth trends. But as the stock market recently illustrated, companies are having trouble generating sufficient earning growth and seem to remain terrified enough to sit on the sidelines until “Better Economic Times” flashes across their boardrooms with the clarity of a neon sign. Rather than invest, corporate America seems still to be obsessed with cutting costs and hoarding cash. Given this hoarding trend, clearly, continuing tax breaks for the top will only give them more to hoard.

“Companies of all sizes are cutting investments. As a result, capital spending has plunged. Orders for non-defense capital goods, a proxy for expectations of business spending plans, fell by 17.8 percent over the last three months, the steepest decline since the first quarter of 2009, the last few months of the recession. According to a September survey from the Business Roundtable, chief executive officers are gloomier than they’ve been since the third quarter of 2009. “CEOs foresee slower overall economic growth for 2012 and have lower expectations for sales, capital expenditures, and hiring,” said Boeing (BA) CEO Jim McNerney, chairman of the Business Roundtable, when the survey was released. A string of bad third-quarter sales numbers from IBM (IBM), McDonald’s (MCD), and Google (GOOG) haven’t helped…

“Businesses and consumers don’t always move in tandem. In the middle of 2008, consumer sentiment plunged before businesses started to pull back in the face of the coming crash, says [Neil Dutta, senior U.S. economist at Renaissance Macro Research]. Still, today’s business-consumer split will need to work itself out: Either consumers will keep spending and business will perk up, or consumers will cut spending as they feel the downward pull of the fundamentals.

“So who’s right? Though consumption accounts for about 65 percent of U.S. gross domestic product, there are signs that the current spending is a blip. ‘I would say that consumption has gone a bit crazy,’ says Paul Ashworth, chief U.S. economist at Capital Economics, who pointed out the strange divergence in an Oct. 17 note to clients. Given the weak employment picture and flat incomes, this level of consumer spending probably isn’t sustainable, particularly since a lot of it is seems financed by people dipping into their piggy banks. The savings rate fell from 4.4 percent to 3.7 from the end of June to the end of August.” BusinessWeek.com, October 24^th.

One big consumer – the U.S. government – seems to be the mover and shaker in pumping buying-capital into the marketplace. But with a fiscal cliff looming and a mood in Congress to mirror Europe’s failed austerity plan, someone might just be pulling the plug on this revenue source in the very near term. In short, we seem to be ready to create another self-fulfilling shot at re-invoking the economic environment that could easily pull this country back into a long-term recession. It’s not about lower taxes or fewer regulations to spur business growth; there is just still too much fear in the trenches.

I’m Peter Dekom, and somewhere common sense seems to have left the building.